SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20450
FORM 10-KSB
(Mark One)
[ X ] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1998 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ____________ to ___________
Commission File Number 0-92402
ON STAGE ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter.)
Nevada 88-0214292
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4625 W. Nevso Drive
Las Vegas, Nevada 89103
- - --------------------------------------------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: 702-253-1333
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: None
Name of each exchange on which registered: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Redeemable Warrants to purchase shares of Common Stock
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days:
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ] <PAGE>
The issuer's revenues for the most recent fiscal year ended December 31, 1998
were $27,847,477.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked prices of such stock as quoted on
April 12, 1999 was $1.19.
The number of shares of the registrant's common stock outstanding as of April
12, 1999 was 7,572,016.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement relating to the 1999 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof. Part
II hereof incorporates information by reference from portions of the
Registrant's Annual Report to Stockholders for the year ended December 31, 1998.
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TABLE OF CONTENTS
Page No.
--------
PART I................................................... 1
Item 1. Description of Business......................... 2
Item 2. Description of Property......................... 24
Item 3. Legal Proceedings............................... 26
Item 4. Submission of Matters to a Vote of
Security Holders............................... 27
PART II.................................................. 28
Item 5. Market for Common Equity and Related
Stockholder Matters............................. 28
Item 6. Management's Discussion and Analysis
or Plan of Operation............................ 28
Item 7. Financial Statements............................. 28
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......... 28
PART III.................................................. 29
Item 9. Directors, Executive Officers, Promoters and
Control Persons, Compliance with Section
16(a) of the Exchange Act........................ 29
Item 10. Executive Compensation............................ 29
Item 11. Security Ownership of Certain Beneficial
Owners and Management............................ 29
Item 12. Certain Relationships and Related Transactions.... 29
Item 13. Exhibits, and Reports on Form 8-K................. 30
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PART I
This document contains certain forward-looking statements that are subject to
risks and uncertainties. Forward-looking statements include certain information
relating to potential new show openings, the potential markets for the Company's
productions, the expansion of existing and potential gaming and tourist markets,
the Company's exposure to various trends in the gaming industry, its acquisition
plans and the benefits the Company anticipates from such acquisitions, the
Company's business strategy, its outstanding litigation matters and the defenses
available to the Company, the seasonality of the Company's business, and
liquidity as well as information contained elsewhere in this Report where
statements are preceded by, followed by or include the words "believes,"
"expects," "anticipates" or similar expressions. For such statements, the
Company claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. The
forward-looking statements in this document are subject to risks and
uncertainties that could cause the assumptions underlying such forward-looking
statements and the actual results to differ materially from those expressed in
or implied by the statements.
The most important factors that could prevent the Company from achieving its
goals--and cause the assumptions underlying the forward-looking statements and
the actual results of the Company to differ materially from those expressed in
or implied by those forward-looking statements--include, but are not limited to,
the information provided under the heading "Description of Business-Risk
Factors" in Item 1 as well as the following: (i) The Company's dependence on its
flagship Legends in Concert production and its principal production venues; (ii)
The ability of the Company to successfully produce and market new productions
and to manage the growth associated with the any new productions; (iii) Risks
associated with the Company's acquisition strategy, including the Company's
ability to successfully identify, complete and integrate strategic acquisitions;
(iv) The Company's ability to meet its commitments under certain credit
facilities, which are currently in default, and to obtain alternative,
additional financing on commercially reasonable terms; (v) The competitive
nature of the leisure and entertainment industry and the ability of the Company
to continue to distinguish its services; (vi) Fluctuations in quarterly
operating results and the highly seasonal nature of the Company's business;
(vii) The ability of the Company to reproduce the performance, likeness and
voice of various celebrities without infringing on the publicity rights of such
celebrities or their estates as well as its ability to protect its intellectual
property rights; (viii) The ability of the Company to successfully manage the
litigation pending against it and to avoid future litigation; and (ix) The
results of operations which depend on numerous factors including, but not
limited to, the commencement and expiration of contracts, the timing and amount
of new business generated by the Company, the Company's revenue mix, the timing
and level of additional selling, general and administrative expense and the
general competitive conditions in the leisure and entertainment industry as well
as the overall economy. See "Description of Business-Risk Factors."
<PAGE>
ITEM 1. Description of Business
General
The Company produces and markets live theatrical productions and operates live
theaters and dinner theaters worldwide. The Company markets its productions
directly to audiences at theaters in resort and urban tourist locations. During
1998, the Company operated the following live theaters and dinner theaters
worldwide.
- - ---------------------- ------------------------ ---------------- --------------
Owned/
Tourist Market Production Location Leased/
Contracted
- - --------------------- ------------------------ --------------- ---------------
Atlatic City,
New Jersey Legends in Concert Bally's Park Contracted
Place
Various Trump Taj Mahal Contracted
Various Atlantic City
Hilton Contracted
- - --------------------- ------------------------- ---------------- --------------
Branson, Missouri Legends in Concert Legends Family
Theater Leased
- - --------------------- ------------------------ ---------------- --------------
Berlin, Germany Legends in Concert Estrel Residence
& Congress Center Contracted
- - --------------------- ------------------------ ----------------- --------------
Buena Park (Anaheim), Wild Bill's Dinner Wild Bill's
California Extravanganza Dinner Theater Leased
- - --------------------- ------------------------ ----------------- --------------
Las Vegas, Nevada Legends in Concert Imperial Palace Contracted
- - --------------------- ------------------------ ----------------- --------------
Laughlin, Nevada Spice 'N Ice River Palms
Casino Contracted
- - --------------------- ------------------------ ----------------- --------------
Myrtle Beach,
South Carolina Legends in Concert Legends Theater Owned
Eddie Miles Show Eddie Miles Leased
Theater
- - --------------------- ------------------------ ----------------- --------------
Orlando, Florida King Henry's Feast King Henry's
Dinner Theater Owned
Wild Bill's Dinner Wild Bill's
Extravaganza Dinner Theater Owned
Fort Liberty
Retail Complex
Blazing Pianos Blazing Pianos Leased
Bar
- - --------------------- ------------------------ ------------------- -------------
Toronto, Orlando Legends in Concert Legends Theater
at Sheraton Leased
Centre Hotel
- - --------------------- ------------------------ ------------------- -------------
Valley Forge,
Pennsylvania Various Lily Langtry
Dinner Theater Contracted
- - --------------------- ------------------------ ------------------ --------------
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The Company also markets its productions to commercial clients, which include
casinos, corporations, fairs and expositions, theme and amusement parks, and
cruise lines. The Company has performed in locations such as the Illinois State
Fair, MGM Theme Park and Dollywood Theme Park; in locations as far away as
Australia, Russia, China, Africa, Japan and the Philippines; and for major
corporate clients such as McDonald's, Hewlett Packard, IBM, Pitney Bowes, Levi
Strauss and Texaco.
For the years ended December 31, 1998 and 1997, approximately 40% and 25%,
respectively, of the Company's net revenue was generated from theaters and
dinner theaters that the Company operates in resort and urban tourist markets;
approximately 41% and 61%, respectively, of the Company's net revenue was
generated from live productions performed in gaming markets, predominantly Las
Vegas and Atlantic City; and approximately 16% and 9%, respectively, of the
Company's net revenue was generated from sales to commercial clients other than
casinos. The remaining 3% and 5%, respectively, of the Company's net revenue was
generated from merchandise and souvenir photography sales.
Such percentages reflect the early results of the Company's new strategic
objective to become the leading owner and operator of affordable live theatrical
productions, dinner theaters and other location-based entertainment in North
America. The Company's primary strategy is to build location-based entertainment
clusters consisting of live theatrical productions and other forms of middle
market entertainment including, for example, musical reviews and magic shows, in
major tourist markets. The Company plans to achieve this strategy by: (i)
establishing a significant market presence through the acquisition of multiple
entertainment venues with strong, predictable cash flows; (ii) pooling its
contacts with ticket wholesalers, tour operators and individual ticket sellers;
and, (iii) rolling out a variety of successful entertainment concepts in the
localities in which the Company establishes its presence. Management believes
this "clustering" strategy will reduce the Company's financial exposure and will
enhance the Company's revenue by (i) increasing the Company's visibility and
market acceptance in a greater number of entertainment venues; (ii) enabling the
Company to realize cost savings through the consolidation of sales and marketing
and the elimination of duplicative administrative overhead; and (iii) enabling
the Company to market productions traditionally performed in a particular venue
in a greater number of venues or an array of markets.
The Company believes that strong fundamentals for the consolidation of multiple
entertainment venues and the establishment of location-based entertainment
clusters exist, including:
- - - a large number of North American resort and urban tourist-driven locations;
- - - fragmented ownership of location-based entertainment businesses;
- - - ownership by individuals who lack the ability to capitalize on economies of
scale in sales and marketing, operations, systems and capital formation;
- - - ownership by individuals who lack a clear exit strategy;
- - - acquisitions characterized by predictable cash flows and the ability to
leverage real and personal property;
- - - numerous cost reduction and revenue enhancement opportunities;
- - - limited competition for acquisitions; and
- - - low acquisition multiples (typically 4.0 - 5.0x EBITDA).
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The Company was incorporated on October 30, 1985 under the laws of the state of
Nevada as Legends in Concert, Inc. Subsequently, on August 7, 1996, the Company
changed its name to On Stage Entertainment, Inc. The Company's principal
executive offices are located at 4625 West Nevso Drive, Las Vegas, Nevada 89103,
and its telephone number is (702) 253-1333.
DEVELOPMENTS DURING 1998
Gedco Acquisition - March 1998
On March 13, 1998, the Company purchased certain assets of Gedco USA Inc., a
Florida corporation, for $14 million. The Company utilized $11.5 million of its
mortgage financing facility with Imperial Commercial Credit Mortgage Investment
Corporation ("ICCMIC") and 595,238 shares of the Company's Common Stock at $4.20
per share, or $2.5 million worth of the Company's Common Stock, to fund this
transaction. Included in the purchase were substantially all of the income
producing assets and associated real property of Orlando Entertains and LA
Entertains, consisting of King Henry's Feast and Blazing Pianos located in
Orlando, Florida, and the Fort Liberty retail shopping complex, which includes
the Wild Bill's Dinner Theater, located in Kissimmee, Florida, and Wild Bill's
Dinner Theater located in Buena Park, California. For the year ended December
31, 1997, audited revenues of the assets purchased were $13.9 million and
earnings before interest, taxes, depreciation and amortization were $2.7
million.
Kodak Relationship - June 1998
On June 3, 1998, the Company and Kodak Themed Entertainment, a division of the
Eastman Kodak Company ("Kodak")that is interested in developing a branded
imaging presence in key entertainment environments, executed a letter of intent,
which contemplates the joint development of retail outlets known as Kodak On
Stage Fantasy Stores (the "Fantasy Stores"). The Fantasy Stores will incorporate
Kodak's digital photographic technology with live impersonators from Legends In
Concert to create a unique and entertaining retail experience, blending the
strengths of Kodak's brand and products with the "star power" provided by the
Company's impersonators. The retail store will include Legends merchandise;
licensed themed clothing, souvenirs of legendary superstars, Kodak traditional
photographic products and Kodak proprietary digital photographic products
featuring licensed character images from The Walt Disney Company, Warner Bros.
Studios and Universal Studios. Initial launch sites in New York, Las Vegas and
Los Angeles are currently under evaluation.
Kodak and the Company have also agreed to share revenue generated by the
operation of digital photography systems to be provided by Kodak in certain of
the Company's theaters under a digital imaging systems agreement executed on
June 3, 1998. The new systems are currently in place in entertainment venues
located in Myrtle Beach, South Carolina, Branson, Missouri and Buena Park,
California.
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Calvin Gilmore Acquisition - June 1998
On June 30, 1998, the Company purchased certain assets of Calvin Gilmore
Productions, Inc. ("Calvin Gilmore"), Myrtle Beach's oldest and largest live
theater operator, for approximately $2.0 million, consisting of $1.0 million in
cash and 206,612 shares of the Company's Common Stock at a price of $3.50 per
share (the "Calvin Gilmore Acquistion"). The Company used $1.1 million of its
mortgage financing facility with ICCMIC to fund the cash portion of the purchase
price. The assets acquired in the transaction include the Legends Theater and a
leasehold interest in the Eddie Miles Theater.
Upon consummation of the transaction, Calvin Gilmore also agreed to order
television programming and production services from the Company, and to give the
Company a 30-day right of negotiation to acquire certain live theatrical/stage
rights in projects developed and owned by Calvin Gilmore over the next five
years. Also, Calvin Gilmore increased its stock ownership to a 5% equity stake
in the Company, and Mel Woods, President of Calvin Gilmore, was elected to the
Company's Board of Directors.
Substantial Indebtedness Incurred
During 1998 the Company received mortgage financing from ICCMIC and extended
exiting lines of credit with First Security Bank of Nevada and First Security
Leasing Company in order to fund its existing operations and finance its growth
strategy and future acquisitions. The Company has been unable to service its
substantial indebtedness and is, consequently, in default under these
facilities. (See "Description of Business-Existing Defaults under Credit
Facilities.")
Industry Background
The Company has focused its clustering efforts in North American resort and
tourist markets. In 1996, international and domestic travelers spent over $473.0
billion on travel and tourism within the U.S. The table below outlines the
spending of domestic and international travelers within the U.S. for the past
ten years.
[Bar Graph Representing Tourism Expenditures in the U.S. omitted]
According to the Travel Industry Association's National Travel Survey of the 715
million trips taken in 1997, over 61% were pleasure trips. In 1997, the most
popular ten states among U.S. travelers were California, Florida, New York,
Texas, Illinois, Nevada, Hawaii, New Jersey, Pennsylvania and Georgia. In 1998
the Company ran productions in seven of these ten states and has identified
potential acquisitions in the other three. Below is a chart illustrating the top
ten states by traveler expenditures.
[Bar Graph Representing Travel Expenditures by State Omitted]
According to the Travel Industry Association of Americans, theme park and
entertainment attractions are one of the top six types of family vacation
destinations. While the most popular destinations include the top gaming sites,
Las Vegas, Nevada and Atlantic City, New Jersey, and the top theme park sites,
Orlando, Florida and Los Angeles, California, several emerging resort locations
such as Myrtle Beach, Florida and Branson, Missouri were also included.
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Set forth below, is general information on the key markets in which the Company
currently operated in 1998.
Anaheim /Buena Park, California
Anaheim/Buena Park, California, home of Disneyland, hosted 37.5 million visitors
in 1997, according to the Anaheim/Orange County Visitors & Convention Bureau.
Visitors spent approximately $5.6 billion, of which $1.3 billion was spent on
entertainment. In Buena Park alone, over $81 million was spent on entertainment
in 1997. The Anaheim Convention Center, in conjunction with Disneyland, has
announced a plan to spend over $2 billion over the next five years to revitalize
the convention center and surrounding areas, and expand Disneyland. Expansion
plans for Disneyland include the construction of: (i) a 750-room Craftsman-style
hotel; (ii) a second theme park to be named "Disney's Californian Adventure;"
and (iii) a 200,000 square foot entertainment, dining and retail complex joining
the two theme parks. The Company believes this new investment will increase
tourism to this market with potentially positive results for other entertainment
suppliers. In March 1998, the Company acquired Wild Bill's Dinner Extravaganza
which performs at the Wild Bill's Dinner Theater in Buena Park, California.
Buena Park is in close proximity to Anaheim, California.
Atlantic City, New Jersey
In 1997, Atlantic City received approximately 37 million visitors according to
the Atlantic City Convention and Visitors Bureau. The Company currently produces
Legends at Bally's Park Place in Atlantic City, and various productions at both
the Atlantic City Hilton and at the Trump Taj Mahal, and has produced numerous
other shows in this market including Magic!, Magic!, Magic! at the Showboat
Hotel and Casino, Cabaret on Ice at Trump's Castle, and Bon Voyage and The
Atlantic City Experience at Bally's Park Place. Furthermore, the Company is
aware of at least two new casino hotel projects under development in Atlantic
City and believes that these will also contain showrooms for live entertainment.
Branson, Missouri
Branson is less than a one-day drive for half of the U.S. population and is a
popular vacation destination. The Branson Chamber of Commerce reported that in
1997, Branson attracted six million visitors. Branson is home to 40
entertainment venues with over 70 live productions. The live entertainment
industry in Branson is atypical of other theater districts, with shows beginning
mid-morning and continuing throughout the day and into the evening. The Company
has presented Legends in Branson since 1995 for limited runs, with successful
results to date. Legends is currently being performed in Branson at the Legends
Family Theater.
Myrtle Beach, South Carolina
Myrtle Beach, which has 99 golf courses and 11 live theatrical venues, was,
according to BYWAYS magazine, ranked the second most highly preferred motor
coach destination in the United States in 1997. The Myrtle Beach Chamber of
Commerce reported that 13.4 million people visited Myrtle Beach in 1997 and
spent approximately $2.6 billion. Visitors, according to the Myrtle Beach
Chamber of Commerce, have an average stay of 5.7 days. The Company's resident
Legends production at the Legends Theater at Surfside Beach (located just South
of Myrtle Beach in beautiful Surfside Beach) opened in March 1995, and is known
as one of the top shows in town.
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Las Vegas, Nevada
In 1997, Las Vegas had over 30 million visitors according to Las Vegas
Convention and Visitors Authority, an increase of almost 30% since 1993, and
spent $25 billion. Las Vegas has 80 hotels and casinos and 35 different live
productions. Visitors to Las Vegas, according to Las Vegas Convention and
Visitors Authority, spent an average of $33.24 a day on shows during an average
4.5 day stay per visitor. According to the Las Vegas Visitor Profile Study, of
these 30 million visitors, 48% attended shows during their stay, up
significantly from 40% in 1994.
Of those people that attended shows, almost 78% attended a regularly scheduled
production show. The Company's Legends has been playing at the Imperial Palace
in Las Vegas since 1983 and the Company has produced numerous limited
engagements and other shows in Las Vegas.
Laughlin, Nevada
Laughlin, Nevada is another emerging tourist market in close proximity to Las
Vegas. According to the Laughlin Visitor's Bureau, 5 million people visited
Laughlin in 1997 and spent an average of $187 per day. In 1997, visitors to
Laughlin spent almost $20 per day on shows and stayed an average of 3.5 days. In
1998, the Company began performances of Spice'N Ice, an ice skating extravaganza
at the River Palms Hotel & Casino.
Orlando, Florida
Orlando is one the most popular destination cities in the United States and was
voted as the number one theme park destination in 1996 by the National Tourism
Association. According to Orlando's Visitors Bureau, approximately 36.5 million
tourists visited Orlando in 1997 and spent $15.9 billion. In 1997, the Orlando
Visitor's Bureau reported that visitors spent $3.3 billion on entertainment and
stayed for an average of 3.7 days. Orlando's hotel industry is meeting the
demands of visitors, with over 85,000 hotel rooms available in 1996, an 8%
growth over the prior four years. In March 1998, the Company acquired King
Henry's Feast, Wild Bill's Dinner Extravaganza and Blazing Pianos, all located
within the greater Orlando area.
Toronto, Ontario
Toronto is the tenth largest metropolitan area in North America and the third
largest English-speaking theater market in the world after London and New York
according to Tourism Toronto, the official tourism sales and marketing agency
for the Toronto region. Approximately 20.2 million tourists visited Toronto in
1997 and spent approximately $3.3 billion. Of the $3.3 billion spent, $193
million was spent on entertainment. Tourism Toronto estimates average spending
per person to be approximately $93 per day. Toronto is home to 83 live
productions in 39 live entertainment venues including the Company's Legends
production featured at the Sheraton Centre Hotel since May of 1998.
Other Potential Urban and Resort Markets
The Company believes that there are numerous other emerging urban and resort
tourist markets, both in the United States and Canada, where the demand exists
for quality, affordable live entertainment. The Company believes that the
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following urban and resort tourist locations may be suitable for the
acquisition, production and marketing of location-based entertainment:
Chicago Niagara Falls
Corpus Christi Orlando
Miami Phoenix
Montreal Pigeon Forge
New Orleans San Diego
New York City San Francisco
South Padre Island Vancouver
OTHER COMMERCIAL CLIENTS
The Company has also produced limited-run Legends shows in the last five years
for other types of commercial clients, including theme parks (Six Flags, MGM
Theme Park, Lotte World in Korea), cruise ships (Royal Caribbean Cruise Lines,
Singapore Cruise Lines), and major fairs (Dade County Youth Fair, Illinois State
Fair). In addition, in 1997 and 1998, the Company produced approximately 185 and
172 events, respectively, for corporate clients, such as McDonald's, Bell South,
Home Depot, IBM, Norwest Bank, and Anheuser Busch.
Show Offerings
Since its inception, the Company has developed, produced or acquired many
different productions. These productions include Legends, other tribute shows, a
variety of musical reviews, magic shows, ice skating productions, and specialty
shows. The principal productions currently produced by the Company are as
follows:
Legends in Concert
The Company's flagship Legends in Concert production is a live theatrical
tribute show featuring impersonators who recreate past and present music and
motion picture superstars. Legends is the longest running independently produced
production in Las Vegas and Atlantic City. Based on the Company's access to
approximately 75 different Legends tribute acts, it can tailor each tribute show
to suit the unique demographics of any audience and the size of any venue, and
has been able to attract significant repeat business by varying regularly the
composition of the acts in its shows. In 1998, Legends was performed in Atlantic
City, New Jersey; Berlin, Germany; Branson, Missouri; Las Vegas, Nevada; Myrtle
Beach, South Carolina; and Toronto, Canada.
Wild Bill's Dinner Extravaganza
As a result of the Gedco Acquisition, the Company acquired Wild Bill's Dinner
Extravaganza ("Wild Bill's"), a two hour dinner show that features the best of
the Wild West. The show includes Indian tribal dances, gun fighting, and
showgirls. The show runs every day throughout the year at the Wild Bill's Dinner
Theater at the Company's Fort Liberty Complex in Kissimmee, Florida and the Wild
Bill's Dinner Theater in Buena Park, California.
King Henry's Feast
As a result of the Gedco Acquisition, the Company acquired King Henry's Feast, a
two hour dinner show that takes the patrons back to the time of King Henry VIII.
The show includes a sword swallower, a jester, a trapeze act and a sword fight.
The show runs every day throughout the year at the Company's King Henry's Feast
Castle located in Orlando, Florida.
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Blazing Pianos
As a result of the Gedco Acquisition, the Company acquired Blazing Pianos, an
interactive piano bar featuring three talented comedic piano players and
vocalists, who simultaneously play song requests from patrons on separate
pianos. The shows runs nightly throughout the year at the Company's Blazing
Pianos Bar in Orlando, Florida.
Spice 'N Ice
Spice 'N Ice combines performances by world class skaters with adagio and
comedic skits by skating clowns, dancers and ensemble skating. Currently, Spice
'N Ice runs at the River Palms Casino in Laughlin, Nevada.
PRODUCTION ECONOMICS
Most financial structures for theatrical productions in theaters in resort and
urban markets and in larger casinos are based on the "four-wall" method of
expense and revenue allocation between the producer and the client, while those
produced for clients, such as smaller casinos, corporations, fairs, cruise lines
and theme parks, are typically "contracted productions" as those produced a for
fixed or "guaranteed" fee.
The four "walls" of any live theatrical production can be illustrated as
follows:
[Graphic presenting four walls of live theaterical production described in
following paragraph Omitted]
The Company generally operates its resident productions in resort and urban
tourist markets and in Las Vegas casinos under either a "four-wall" arrangement
or a "two-wall" arrangement. Under the "four-wall" arrangement the Company
assumes the responsibility for the cost of the theater, whether leased or
purchased, and the expenses associated with (i) the artistic aspects of the
production of a show; (ii) the technical requirements associated with producing
a show; (iii) the promotion of a show; (iv) and ticket sales, concession sales
and maintenance. The Company receives 100% of the revenues, profits and/or
losses generated by a show under that arrangement. Under the "two-wall"
arrangement the client owns or manages the theater. The Company and the client
are responsible for two of the costing responsibilities, or "walls," described
above. The Company and its client share revenue generated by a show under this
arrangement(each retains certain percentages of the show's revenues). Shows
produced under either of these two arrangements are referred to as "at-risk"
shows, as the Company's revenues are dependent upon customer attendance levels.
The Company's resident Legends shows at Myrtle Beach, South Carolina and
Toronto, Canada are examples of "four-wall" arrangements, and its Legends show
at the Imperial Palace in Las Vegas, Nevada is an example of a "two-wall"
arrangement. Although most contracts of this type are by their nature
short-term, clients typically renew their contracts or host a variety of Company
productions on a regular basis.
The Company also operates "low-risk" productions where the client is responsible
for all non-production related expenses and retains all revenue generated from
ticket sales. In such arrangements, the Company is responsible for all
production related expenses (performers, orchestra, dancers and company manager)
and typically receives a guaranteed weekly fee, regardless of attendance levels.
This is a typical structure for shows sold to commercial clients such as
corporations, fairs and theme parks, and to casinos outside the Las Vegas,
Nevada market. The Company's Legends show at Bally's Park Place in Atlantic
City, New Jersey is an example of a "low-risk" arrangement. Although many of
these contracts are short term, clients typically renew their contracts with the
Company on a regular basis.
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CORPORATE STRUCTURE
On Stage Casino Entertainment
The Company has been a leading provider of live entertainment to casinos for
over 15 years.
In 1998, On Stage Casino Entertainment had long running productions in the
following locations:
- - ------------------- ----------------------- ----------------------------------
Venue City Type of Structure
- - ------------------- ----------------------- ----------------------------------
Imperial Palace Las Vegas "Two-Wall"
Bally's Park Place Atlantic City Guaranteed Fee
River Palms Casino Laughlin Guaranteed Fee
Trump's Taj Mahal Atlantic City Guaranteed Fee
- - ------------------- ----------------------- ----------------------------------
On Stage Theaters
Upon completion of the acquisition of the Gedco properties, the Company formed
On Stage Theaters, Inc., a wholly-owned subsidiary created to manage the
Company's theaters from its offices in Orlando, Florida. During 1998 the Company
operated eight live theater productions, managed the sublease of the Eddie Miles
Theater and produced two shows under contract in the following locations:
- - ----------------- -------------- ----------- ------------- ------------
Venue City # of Seats Own/lease/ Date of
contracted expiration
- - ----------------- -------------- ----------- ------------- ------------
Contracted
Productions:
Lily Langtry
Dinner Theater Valley Forge, PA 500 Contracted 1/00
"Four - Wall"
Productions:
Blazing Pianos Bar Orlando, FL 400 Lease 10/00
Eddie Miles Theater * N.Myrtle Beach, SC 946 Lease 12/04
King Henry's Dinner
Theater Orlando, FL 620 Own N/A
Legends Theater Myrtle Beach, SC 800 Own N/A
Legends at Sheraton
Centre Hotel Toronto, ON 647 Lease 2/03
Wild Bill's Dinner
Theater Buena Park, CA 820 Lease 6/10
Wild Bill's Dinner
Theater Kissimmee, FL 628 Own N/A
Legends Family
Theater Branson, MO 984 Lease 12/98
- - ----------------- --------------- ----------- ------------ -------------
* Included in discussion of the Calvin Gilmore Acquisition.
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On Stage Events
On Stage Events creates numerous types of special entertainment events for
corporate clients such as casinos, fairs, theme parks, cruise lines and
corporations. These events utilize the Company's inventory of props,
decorations, sound, lighting and costumes. In addition to creative
custom-designed events, this business segment has in-stock, unique interactive
shows, as well as stage shows, which have played for long runs at theaters and
casinos and are now available for private events. On Stage Events has typically
produced either interactive dinner shows or theme parties such as Las Vegas
Spectacular, a theme party in which a casino is created and participants are
allowed to gamble as if they were in a Las Vegas casino. In 1998, the division
had sales offices in Atlantic City, New Jersey, Atlanta, Georgia, Palm Springs,
California and Las Vegas, Nevada. Examples of the Company's corporate clients
are:
Illinois State Fair Dollywood Theme Park Hyatt Hotels Worldwide
MGM Theme Park McDonald's Six Flags Over Georgia
Hewlett Packard IBM National Football League
Levi Strauss Texaco Xerox
On Stage Merchandise
On Stage Merchandise sells merchandise at all of its venues in tourist locations
and, if permitted, in client venues. Merchandise includes logo clothing,
keychains, magnets, pins, canvas tote bags and coffee mugs, plus specialty
licensed merchandise featuring the Company's more popular Legends acts such as
Elvis, the Blues Brothers and Marilyn Monroe. In addition, this wholly-owned
subsidiary sells autographed photographs of impersonators or other headline acts
posing with audience members, for which it pays nominal royalties to featured
performers. The Company believes that its relationship with Kodak Themed
Entertainment will further augment revenues from merchandising (see
"Developments During 1998").
On Stage Productions
On Stage Productions is a centralized division of the Company, located in Las
Vegas, Nevada. This division is capable of producing multiple shows of varying
complexity. Among its responsibilities are choreography, costume, talent,
lighting and sound. The Company intends to produce multiple shows in each
locality in which the Company has established itself through a single production
facility. In addition, the Company intends to offset some of the costs
associated with this production division by producing and/or renting production
services to other clients, such as Fox Family.
CORPORATE OPERATIONS
Sales and Marketing
Since many people plan to attend a specific live performance prior to leaving
for vacation, it is imperative that the Company market itself to potential
customers before they arrive at their destination. The development and
maintenance of amicable, professional relationships with individual sales
representatives and individuals working in group sales offices is, therefore,
integral to the Company's clustering strategy. At some point in the future, the
Company may invest in or acquire receptive operators in the future.
The Company generally targets mass market audiences with average prices for its
productions ranging from $20.00 to $40.00 per adult ticket. Show pricing is
determined by competition in the local marketplace and is typically neither the
lowest nor the highest in a particular market. Once ticket pricing has been
determined, the composition of the show (number of headline acts, singers,
dancers, orchestra, technicians, etc.) and facility and equipment requirements
are adjusted so that each show will generate profits based upon projected
attendance. The Company distributes, from time to time, show coupons offering
discounts of up to 20% on individual ticket purchases, and offers volume
discounts of up to 60% to ticket and tour wholesalers buying large blocks of
tickets.
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Advertising and Promotion
The Company provides advertising and publicity support and seeks major ongoing
media coverage for all of its shows through its network of media contacts.
Exposure on television and radio, and in national periodicals, major
metropolitan newspapers, and local tourist entertainment guides has served to
promote the Company's shows both regionally and nationally. Over the last three
years, publicity for the Company included appearances at the 1996 Miss Universe
Pageant, Jay Leno's Tonight Show from Las Vegas, Nevada, VH1's Route 96, CNN's
Burden of Proof and on Wheel-of-Fortune. In February 1999, the Company's Legends
Show in Branson, Missouri was featured on a winter season special on The
Nashville Network.
Advertising designed to target the individual tourist includes newspaper and
magazine print ads, television and radio commercials, airport videos and
signage, billboard and outdoor advertising, transit advertising, and brochures
placed in areas with a high concentration of tourists (such as visitor and
tourist welcome centers). In some resort markets, such as Myrtle Beach, South
Carolina and Branson, Missouri advertising commences up to one year in advance
of a show's opening, and includes direct mail campaigns, attendance at consumer
and travel trade shows, and placement of print ads in travel and trade
publications. Within casinos and hotels, table tent cards, coupons, flyers and
brochures are placed in each guest-room, restaurant and lounge, whenever
possible and promotional show videos are broadcast on in-house television
systems. As the Company begins to control other pieces of the distribution
chain, and forms entertainment clusters, traditional advertising and promotion
costs can be decreased due to economies of scale.
Competition
The leisure and entertainment market, which includes the market for live
theatrical productions, is highly competitive. Many of the Company's markets
contain a large number of competing live theatrical productions. In resort and
urban tourist locations, the Company competes for ticket sales with other live
productions and headline stars, many of whom have better name recognition and
greater financial and other resources than the Company.
The live theatrical entertainment industry is highly fragmented and contains
many small, independent production companies and several major production
companies. The Company competes with these production companies for the most
desirable commercial and tourist venues, and for talent and production
personnel. Major production companies in the Company's markets include Feld
Entertainment Productions, Blair Farrington Productions and Dick Foster
Productions in Las Vegas, and Greg Thompson Productions in Seattle. In addition
to competition from major production companies, which produce other forms of
live theatrical shows, the Company also competes directly against a large number
of smaller independent producers who sometimes produce tribute or impersonator
shows. However, the Company believes that only one of these competitors, Spring
Time Productions, produces such shows on a continuous basis in more than one
location, and therefore presently offers any real competition to the Company.
Spring Time Productions currently produces its American Superstars impersonator
shows at the Stratosphere Hotel and Casino in Las Vegas, Nevada and at the Grand
Casinos in Gulfport, Mississippi.
In Orlando, Florida and Buena Park, California, where the Company operates
dinner theaters, other major competing dinner theater shows include Medieval
Times, Arabian Nights, and Wizards. The dinner theater market is highly
competitive and the Company finds itself competing with other forms of live
entertainment in addition to the dinner theaters, primarily theme parks.
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Talent
The Company has featured approximately 175 impersonators and numerous variety
acts (magicians, aerial acts, jugglers, clowns, sword fighters, jesters and
comedians), singers, dancers, musicians and musical directors in its
productions, and regularly receives promotional materials from individuals who
are eager for work. An average of 30 inquiries are received per month, and for
every working performer, the Company has access to three potential performers.
The Company periodically holds auditions for new impersonators, singers, and
dancers in Las Vegas, Atlantic City, Myrtle Beach, South Carolina and Los
Angeles, California and often views acts in outside show environments and clubs.
All performers receive creative and professional support from the Company's
various in-house personnel. The Company employs choreographers to work with new
and existing entertainers to develop their skills and improve their confidence
on stage. Utilizing the Company's in-house music library, musical arrangements
are developed for new and existing performers and digital audio tapes are
developed for principal acts. The Company's in-house wardrobe personnel,
together with several well established costume designers, create new performers'
wardrobes and update the wardrobes of existing talent. The Company contracts
with an independent photographer to provide promotional photographs of the
headline acts and employs a writer to prepare professional biographies and press
releases.
The Company believes it is the premier producer of impersonator shows worldwide
and has the ability to offer a variety of consistent work to its acts by
rotating them among its different shows and events. The Company's musicians,
singers, dancers and production personnel are generally employees of the
Company, while headline acts, including the impersonators utilized in the
Company's tribute shows, are treated as independent contractors in accordance
with industry practice.
Intellectual Property
The Company has the filed the following intellectual property marks:
Name: Class(es) Status Country
Legends in Concert 41 Registered United States
Legends in Concert 41 Registered Japan
Legends in Concert 41 Registered Canada
Legends in Concert 41 Registered Great Britain
Legends in Concert 41 Registered Mexico
Legends in Concert 6, 16, 18, 21,
25, 26 Registered United States
Legends in Concert
w/ design 6, 16, 18, 21,
25, 26 Registered United States
Legends in Concert 41 Pending Europe
Legends in Concert 41 Pending Australia
Legends of Country 41 Pending United States
Legends Live 107 Registered United States
Legends of the
Rat Pack 41 Published United States
Atlantic City
Experience 41 Registered United States
Camouflage Aux
Folles 41 Published United States
Wild Bill's
Extravaganza 41 Pending United States
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The Company anticipates filing applications for protection of its Legends
service mark in France, South America, China and several other foreign
countries, as need be. The Company believes it either owns or has appropriately
licensed all of the intellectual property rights required to perform its shows
in the manner in which they are currently produced, including, but not limited
to the right to publicly present and otherwise perform all non-dramatic
copyrighted musical compositions pursuant to musical licenses with Broadcast
Music, Inc. ("BMI") and American Society of Composers, Authors and Publishers
("ASCAP").
The Company typically requires its independent contractors, employees,
consultants and advisors to execute appropriate confidentiality and
non-competition agreements in connection with their employment, consulting or
advisory relationship with the Company.
Government Regulation
Providing entertainment to the casino gaming industry may subject the Company to
various licensing regulations. The Company is regulated and required to obtain a
casino industry license from the New Jersey Casino Control Commission pursuant
to the New Jersey Casino Control Act. The Company's current casino service
industry license from the New Jersey Casino Control Commission was issued on
January 17, 1997 and expires on September 30, 1999. In connection with the
license application, the New Jersey Division of Gaming Enforcement conducted an
investigation of the Company to determine its suitability for licensure.
Management believes that the Company is not required to obtain a license to
provide its services to casinos in Nevada or in any other jurisdictions in which
it operates, other than New Jersey. The Nevada Gaming Control Board and similar
authorities in other jurisdictions, however, have broad authority to order
providers of services to casinos to file applications, be investigated, have
their suitability determined, obtain licenses and cease providing their
services, if they find the service providers to be unfit. Additionally, many of
the casinos mandate that a production company is either properly licensed or in
accordance with the local gaming laws before it will contract for their
services.
In addition, the Company leases or owns certain of the theaters for its new
brand-name resident productions, thereby absorbing all costs and risks
associated with producing the show in order to retain 100% of the show's
profits. Producing shows under this "four-wall" arrangement may require the
Company to obtain and maintain certain local licenses and permits (as the
Company was required to obtain for the opening of its Myrtle Beach show,
a"four-wall" production). Such licenses and permits could include, among others,
amusement licenses, music licenses (i.e., BMI or ASCAP), business licenses,
liquor licenses, retail sales tax licenses, food and beverage licenses and a
health inspection rating (if dairy products and/or hot food, other than popcorn,
is to be sold). Difficulties or failure in obtaining required licenses or
regulatory approvals could delay or prevent the opening of a new show or, alter,
delay or hinder the Company's expansion plans. In addition, the suspension of,
or inability to renew, a license needed to operate any of the Company's
currently running productions would adversely affect the operations of the
Company.
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Employees
As of March 25, 1999, the Company employed approximately (i) 182 full-time
employees, including 51 entertainers, 37 theater operations personnel, 17
production personnel, 25 food & beverage personnel, 40 administrative personnel,
20 marketing personnel, 8 box office/concession personnel and its nine executive
officers; and (ii) 402 part-time employees. None of the Company's current
employees are covered by a collective bargaining agreement. The Company believes
that its relationship with its employees is good.
EXISTING DEFAULTS UNDER CREDIT FACILITIES
Working Capital Line
In May 1997, First Security Bank of Nevada ("First Security") issued a line of
credit to the Company for up to $250,000. Borrowings under such facility bear
variable interest at 1.5% over the First Security Bank of Idaho's index (10% per
year as of the facility's inception) and are due on demand. John W. Stuart has
personally guaranteed the line of credit.
On March 28, 1998, First Security agreed to increase the line of credit from
$250,000 to $1,000,000 and the expiration date was extended to March 25, 1999.
As of December 31, 1998, the Company had drawn $1,000,000 on the line of credit.
As of March 31, 1999, the Company had failed to pay off any part of the line of
credit and, is in default under its terms. The Company is continuing to
negotiate with First Security to either extend the line of credit or convert it
into a term loan facility. As of April 15, 1999 the Company had not received a
notice of default from First Security, but there can be no assurance that the
Company's attempts to negotiate an extension or restructuring of this loan will
be successful or that First Security will not seek to collect this debt.
Capital Equipment Financing Commitment
On September 29, 1997, First Security Leasing Company ("First Security
Leasing"), a Utah corporation, approved the Company for a $1,000,000 lease line.
Advances under the line of credit incur interest at a rate of 9.75% per annum.
The lease line has been utilized in the following amounts: $389,290,$442,997 and
$167,713, commencing in April, 1998 and May, 1998, respectively, and terminating
on October, 2001, September, 2001 and November 2001. The Company is, as of April
15, 1999, current under this line of credit however, all of these leases have a
cross-default provision with the working capital line.
Mortgage Financing Commitment
On March 13, 1998, Imperial Credit Commercial Mortgage Investment Corporation
("ICCMIC") agreed to provide up to $20,000,000 of mortgage financing to the
Company. On the same date, the Company used $12,500,000 of said facility to fund
the cash portion of the Gedco Acquisition and related fees. The Company
subsequently used $1,100,000 on June 30, 1998 to fund the cash portion of the
Calvin Gilmore Acquisition and $550,00 on October 7, 1998 for its its working
capital needs. Concurrently with the ICCMIC financing, Mark Karlan, the
President of ICCMIC, was named a member of the Company's Board of Directors,
filling a vacancy created by the resignation of Kenneth Berg. The Company made
its January, February and March 1999 payments after the due date for such
payments. As a result of such delinquencies, the Company incurred late charges
and default interest, which the Company has not paid. The Company is in default
under the ICCMIC facility and is unable to borrow additional funds under such
facility. As of April 14, 1999, the Company had not made its payment to ICCMIC
due April 1, 1999. The Company is currently negotiating with ICCMIC to extend
some of the repayment terms under this facility and to obtain waivers or
amendments with respect to certain other defaults under the facility, including
a breach of certain debt service coverage ratio warrants by the Company.
In the event that First Security, First Security Leasing or ICCMIC issues notice
of default under any of the above-referenced credit facilities and initiate
foreclosure action against the Company, all or a portion of the Company's
property and assets securing the credit facilities and mortgage financing
extended by such lenders may be sold to satisfy the Company's commitments under
the terms of such facilities. The Company intends to renegotiate the terms of
its credit facilities, to obtain extensions of the terms of such facilities and
to seek alternative additional financing. There can be no assurance that the
Company's efforts will be successful.
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RISK FACTORS
The following risk factors may prevent the Company from achieving its goals and
could cause the actual results of the Company to differ materially from any
results that are expressed or implied in forward-looking statements contained in
this document.
Increased Operating Expenses. Increased operating expenses in connection with
the Company's proposed expansion plans, delays in the introduction of new
productions and factors adversely affecting the Company's current productions,
could have a material adverse effect on the Company's future operating results.
There can be no assurance that the Company will continue to generate significant
net income in the future or that the Company's future operations will be
profitable.
Dependence on Legends. To date, the Company's revenue has been limited largely
to the production of Legends. The future success of the Company will depend, to
a significant extent, on its ability to successfully produce and market Legends
shows in other venues. To the extent the Company is unsuccessful in expanding
the production of Legends, or to the extent the Legends production concept
ceases to be successful or profitable for the Company, there will be a material
adverse effect on the Company's business, financial condition and results of
operations.
Reliance on Principal Production Venues; Contractual Arrangements. The Company
anticipates that it will continue to rely upon its three current largest revenue
producing show sites, i.e., its resident Legends productions in Las Vegas,
Nevada, Atlantic City, New Jersey and Myrtle Beach, South Carolina, for the
substantial majority of its revenues. The loss of all or a substantial portion
of the business resulting from these relationships would have a material adverse
effect on the Company's business, financial condition and results of operations.
Risks Relating to Proposed Expansion Plans; Possible Inability to Manage Growth.
The Company's continued growth depends, to a significant degree, on its ability
to produce and market new theatrical productions on a profitable basis. The
Company's expansion plans include increasing both the number of productions in
operation at any given time and the rate at which such productions open. Because
of the current defaults under its credit facilities and its present inability to
raise additional capital, the Company may not be able to pursue its expansion
plans. Such expansion strategy if successful, will place significant pressures
on the Company's personnel, as such growth will require development and
operation of a significantly larger business over a broader geographical area.
The success of the Company's expansion strategy will depend upon a number of
factors, including, among others, the Company's ability to hire and retain
additional skilled management, marketing, technical and performing arts and
theatrical production personnel, its ability to secure suitable venues for new
productions on a timely basis and on commercially reasonable terms, and its
ability to successfully manage its growth (which will require it to develop and
improve upon its operational, management and financial systems and controls).
The Company's prospects and future growth will also be largely dependent upon
the ability of its Legends productions to achieve significant market share in
targeted tourist and gaming markets and the ability of the Company to develop
and/or acquire and commercialize additional productions. There can be no
assurance that the Company will be able to achieve its expansion goals or that,
if it is able to expand its operations, it will be able to effectively manage
its growth, anticipate and satisfy all of the changing demands and requirements
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that such growth will impose upon it or achieve greater operating income or
profitability. Moreover, in light of (i) the significant up-front capital
expenditures and pre-opening costs (estimated to be approximately $400,000 to
$800,000 in the case of a leased theater and up to $1,000,000 in the case of a
purchased theater) associated with the establishment of a new "four-wall"
resident production, (ii) the length of time required to prepare for the opening
of a new resident production (typically 3 to 6 months) and (iii) the significant
time required before a new resident production can achieve the market acceptance
and name recognition required for local ticket wholesalers and tour specialists
to promote it, the discontinuation of any such new production (whether due to
inadequate advance marketing, inadequate performances, poor site selection or
otherwise) would have a material adverse effect on the Company.
Need for Additional Financing. The Company's cash, cash equivalent balances and
anticipated revenues from operations will not be sufficient to fund its current
expansion strategy or its operating requirements or to service its substantial
indebtedness under existing credit facilities. The Company must obtain
alternative additional sources of financing in order to avoid foreclosure under
its existing credit facilities. There can be no assurance that such funds will
be available to the Company and will not be exhausted prior to the satisfaction
of the Company's commitments under the existing credit facilities or the
implementation of its growth strategy. The Company has no current arrangements
with respect to, or potential sources of, additional financing, and any
inability to obtain such financing could cause the Company to curtail, delay or
eliminate present or anticipated productions, or to fund such productions
through arrangements with third parties that may require the Company to
relinquish rights to substantial portions of its revenues, and could possibly
cause the Company to cease its expansion plans and may result in the foreclosure
of its existing credit facilities.
Risks Associated with Proposed Acquisition Strategy. As part of its expansion
plans if the Company is able to pursue them, the Company intends to pursue
strategic acquisitions of, or joint ventures with, independent production
companies, and to market Legends to the established customer bases of any such
acquired companies, in order to increase its revenues and market share. In
addition, the Company intends to acquire established, brand-name shows which it
believes have the potential to be successful in new markets. The Company has
planned to enter into such arrangements on a shared revenue and/or profit basis
and to make such acquisitions through limited equity distributions rather than
through cash payments or investments. Nonetheless, there may, in the future, be
attractive acquisition candidates for which cash funding is the Company's only
choice, in which case, any such acquisitions may be contingent upon the Company
acquiring additional financing. There can be no assurance that the Company will
be able to acquire such financing or, even with additional financing, that it
will be able to acquire acceptable production companies or shows, nor can there
be any assurance that the Company will be able to enter into beneficial joint
ventures, on commercially reasonable terms or in a timely manner. Furthermore,
the Company can provide no assurance that any acquired customer bases will be
receptive to Legends or Legends-type productions or that the Company will be
able to successfully develop any acquired shows. To the extent the Company does
effect
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an acquisition or joint venture, there can be no assurance that the Company will
be able to successfully integrate into its operations any business or
productions which it may acquire. Any inability to do so, particularly in
instances in which the Company has made significant capital investments, could
have a material adverse effect on the Company. In addition, there can be no
assurance that any acquired business will increase the revenues and/or market
share of the Company or otherwise improve the financial condition of the
Company.
Competition. The leisure and entertainment market, which includes the market for
live theatrical productions, is highly competitive, and many of the Company's
markets contain a large number of competing live theatrical productions. In
resort and urban tourist locations, the Company competes for ticket sales with
the producers of other live productions, many of whom have greater financial and
other resources than the Company and/or feature productions and headline stars
with greater name recognition than those of the Company. In addition, the
Company competes with other production companies for the most desirable
commercial and tourist venues and for talent and production personnel. The
Company's inability to secure such venues or personnel could have a material
adverse effect on the Company's expansion plans and results of operations. In
addition, one or more of the commercial venues in which the Company currently
has, or plans to have, a live production show could decide to self-produce its
live entertainment needs. There can be no assurance that the Company will be
able to secure alternative venues for displaced productions or that such
alternative venues could be secured under similar or favorable terms.
Availability of Talent. The Company's future success will depend largely upon
its ability to attract and retain personnel sufficiently trained in performing
arts and theatrical production, including singers, dancers, musicians,
choreographers and technical personnel. The Company maintains rigorous standards
with respect to the abilities and level of experience of such personnel in order
to ensure consistency, quality and professionalism in its productions, which may
make it more difficult for the Company to obtain qualified personnel. Moreover,
any such difficulty is compounded by the fact that Legends, the Company's
flagship production, features impersonators of past and present superstar
vocalists. Because such headline performers must look, sound and act like
specific celebrities, the pool of performers from which the Company can chose is
significantly reduced. In addition, while the Company's musicians, singers,
dancers and production personnel are generally employees of the Company, its
headline acts are independent contractors who enter into new contracts with the
Company for each new show or venue in which they perform. The Company does not
maintain any long-term contracts with its performers. The Company will need to
hire additional performers and production technicians as it continues to open
new productions, as well as to supplement personnel in its existing productions.
The Company's inability to attract and retain such personnel, for either new or
existing productions, could have a material adverse effect on the Company's
expansion plans, business, financial condition and results of operations. See
"Business -- Talent."
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Fluctuations in Quarterly Operating Results; High Seasonality. The Company has
experienced, and expects to continue to experience, fluctuations in quarterly
results of operations. The Company's live theatrical production business is
highly seasonal. The Company expects such seasonal trends to continue.
Additionally, the Company typically spends significant resources on new resident
theatrical productions up to six months in advance of show openings, and
believes that, as the Company emphasizes pre-opening market research and
development as part of its expansion plan, both the amount of pre-opening
expenditures and the lag between the time in which the Company incurs such
expenditures and the receipt of post-opening revenue will increase. Accordingly,
the Company's operating results may also vary significantly from quarter to
quarter or year to year due to the opening and timing of new shows and the
fluctuations associated with the pre-opening and start-up phases of new
productions in new and varying venues. Consequently, revenues as well as profits
and losses may vary significantly from quarter to quarter and the results in any
one period will not necessarily be indicative of results in subsequent periods.
Effect of Recession on Live Entertainment Industry; Changing Trends. The live
entertainment industry is cyclical, with consumer spending tending to decline
during recessionary periods when disposable income is low. Although the Company
believes that its moderate ticket prices may enhance the appeal of its
productions to consumers in a recessionary environment, there can be no
assurance that a poor general economic climate will not have an adverse impact
on the Company's ability to compete for limited consumer resources. The live
entertainment industry is also subject to changing consumer demands and trends
and while the markets for live entertainment have grown significantly over the
past several years, there can be no assurance that such growth will continue or
that these trends will not be reversed. For instance, the rate of growth in the
casino gaming industry has recently begun to decrease due to consolidation
within the industry. The Company's success will depend on the Company's ability
to anticipate and respond to changing consumer demands and trends and other
factors affecting the live entertainment industry, including new artists and
musicians, as well as general trends affecting the music industry and its
performers. Failure to respond to such factors in a timely manner could have a
material adverse effect on the Company. Dependence on the Casino Gaming
Industry. Although the Company has recently shifted its primary emphasis away
from gaming markets and towards the resort and urban tourist markets, the
Company's success has been, and will continue to be, highly dependent on the
casino gaming industry. Consequently, a change in the laws or regulations
governing the casino gaming industry, or a significant decline in casino gaming
in the United States could have a material adverse effect on the Company's
business, financial condition and results of operations.
Intellectual Property. The Company's success depends to a large extent on its
ability to reproduce the performance, likeness and voice of various celebrities
without infringing on the publicity rights of such celebrities or their estates.
Although the Company believes that its productions do not violate such
intellectual property rights under applicable state and Federal laws, in the
event such a claim were made against the Company, such litigation, regardless of
the outcome, could be expensive and time consuming for the Company to defend.
Additionally, if the Company were determined to be infringing any intellectual
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property rights in the production of its performances, the Company could be
required to pay damages (possibly including treble and/or statutory damages),
costs and attorney fees, alter its productions, obtain licenses or cease certain
activities, all of which, individually or collectively, could have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, if the Company were required to obtain licenses from
the celebrities it impersonates, there can be no assurance that the Company
would be able to acquire such licenses on commercially favorable terms, if at
all. In addition, an element of the Company's business strategy is to expand its
merchandising program by introducing a wider variety of clothing items and new
products such as compact discs, and audio and video tapes. The Company has filed
trademark applications, as necessary, in order to protect its rights in the
products that it sells. There can be no assurance that the Company will be able
to obtain any such trademarks on terms and conditions acceptable to the Company.
The Company's inability to obtain such rights could have a material adverse
effect on the Company's ability to successfully implement its merchandising
strategy.
Government Regulation. Providing entertainment to the casino gaming industry may
subject the Company to various licensing regulations. For instance, the Casino
Control Commission of the State of New Jersey requires that the Company obtain a
Casino Service Industry License to perform its shows at its Atlantic City
venues. Although the Company has obtained this license, there may be other
licenses or permits which may be required in order for the Company to perform
its shows in casinos in other areas. In addition, pursuant to the Company's
expansion program, the Company plans to lease or purchase some, if not all, of
the theaters for its new Legends or other brand-name resident productions,
thereby absorbing all costs and risks associated with producing the show in
order to retain 100% of the show's profits (referred to as a "four-wall"
production). Producing shows on this basis may require the Company to obtain and
maintain certain business, professional, retail and local licenses and permits
(as the Company was required to obtain for the opening of its Myrtle Beach show,
a "four-wall" production). Difficulties or failure in obtaining required
licenses or regulatory approvals could delay or prevent the opening of a new
show or, alter, delay or hinder the Company's expansion plans. In addition, the
suspension of, or inability to renew, a license needed to operate any of the
Company's currently running productions would adversely affect the operations of
the Company.
Dependence on Key Personnel. The Company's future success will depend largely on
the efforts and abilities of its existing senior management, particularly Mr.
Stuart, the Company's Chairman, Chief Executive Officer and principal
stockholder, and David Hope, the Company's President and Chief Operating
Officer. The loss of the services of such officers or other members of the
Company's management team could have a material adverse effect on the Company's
business, financial condition and results of operations. Although the Company
currently maintains a key-man life insurance policy on the life of Mr. Stuart in
the amount of $5,000,000 and on the life of Mr. Hope in the amount of
$2,500,000, such proceeds may not be sufficient to compensate the Company for
the loss of their services. In particular, Mr. Stuart's death would result in
the loss of his creative contribution to the Company and would give the owner of
the Imperial Palace the right to terminate its contract with the Company
relating to the Company's resident Legends production in Las Vegas (one of the
Company's largest revenue producing venues). In addition, while Messrs. Stuart
and Hope have entered into non-competition agreements restricting their ability
to work for a competitor of the Company during the term of their employment
agreements (which expire on May 31, 2000) and thereafter for periods of up to
five and two years, respectively, there can be no assurance that such
non-competition agreements will be enforceable. Finally, there can be no
assurance that the Company will be able to attract and retain the additional
qualified senior management personnel necessary to manage its planned growth.
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Risk of Employment Tax Liability. Pursuant to industry standards, the Company
has, since its inception, treated, and expects to continue to treat, the
headline acts of its productions as independent contractors rather than as
employees. In making the determination that it is qualified to characterize its
headline acts as independent contractors, the Company, in addition to following
industry precedent, made an independent review of, and analyzed, the applicable
guidelines issued by the Internal Revenue Service. There can be no assurance,
however, that the Company is qualified to treat the headline acts as independent
contractors. In the event that the Company has improperly classified the
headline acts as independent contractors, the Company would be liable for the
payment of employment taxes for those periods in which the headline acts were
incorrectly characterized as independent contractors. If imposed, such
employment tax liability could have a material adverse effect on the Company's
financial condition and results of operations.
Litigation. The Company is involved in certain pending and threatened lawsuits
in which the adverse parties are seeking damages from the Company. There can be
no assurance that any of the instituted or threatened lawsuits will be settled
or decided in favor of the Company. Moreover, regardless of the outcome of such
lawsuits and claims, in the event the Company were to be engaged in protracted
litigation the costs of such litigation could be substantial. Even in situations
where the Company is fully indemnified by third parties, the time and effort
expended by the Company's personnel in connection with such matters could be
significant, leaving them with less time and energy for the pursuit of the
Company's strategic goals. The Company may utilize a portion of the proceeds of
this offering allocated to working capital in connection with these litigation
matters or settlements thereof. Although the Company does not anticipate that a
material portion of the proceeds of this offering will be required to be used in
connection with such litigation matters, in the event that a material portion is
required, the Company will have less financial resources available to it for
other purposes which could adversely affect the Company.
21
<PAGE>
Limitations on Liability of Directors and Officers. The Company's Articles of
Incorporation include provisions to eliminate, to the full extent permitted by
Nevada General Corporation Law as in effect from time to time, the personal
liability of directors of the Company for monetary damages arising from a breach
of their fiduciary duties as directors. The Company's Articles of Incorporation
also include provisions to the effect that the Company shall, to the maximum
extent permitted from time to time under the law of the State of Nevada,
indemnify and, upon request, advance expenses to any director or officer to the
extent that such indemnification and advancement of expense is permitted under
such law, as it may from time to time be in effect.
No Dividends. The Company has never paid any dividends on its Common Stock and
does not anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain all earnings for use in connection with the
expansion of its business and for general corporate purposes. The declaration
and payment of future dividends, if any, will be at the sole discretion of the
Company's Board of Directors and will depend upon the Company's profitability,
financial condition, cash requirements, future prospects, and other factors
deemed relevant by the Board of Directors. Possible Adverse Effects of
Authorization of Preferred Stock. The Company's Articles of Incorporation
authorize the Company's Board of Directors to issue up to 1,000,000 shares of
"blank check" preferred stock (the "Preferred Stock") with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors will be empowered, without
stockholder approval, to issue Preferred Stock with dividend, liquidation,
conversion, voting, or other rights, which could adversely affect the voting
power of the holders of Common Stock and, under certain circumstances, could
make it difficult for a third party to gain control of the Company, prevent or
substantially delay a change in control, discourage bids for the Common Stock at
a premium, or otherwise adversely affect the market price of the Common Stock.
Although the Company has no current plans to issue any shares of Preferred
Stock, there can be no assurance that the Board will not decide to do so in the
future.
Current Prospectus and State Registration Required to Exercise Warrants. Holders
of outstanding Company warrants will be able to exercise their warrants only if
(i) a current prospectus under the Securities Act relating to the securities
underlying the warrants, is then in effect and (ii) such securities are
qualified for sale or exempt from qualification under the applicable securities
laws of the states in which the various holders of warrants reside. Although the
Company intends to use its best efforts to maintain a current prospectus
covering the securities underlying the warrants at the earliest practicable
date, to the extent required by federal securities laws, there can be no
assurance that the Company will be able to do so. The value of the warrants may
be greatly reduced if a prospectus covering the securities issuable upon the
exercise of the warrants is not kept current or if the securities are not
qualified, or exempt from qualification, in the states in which the holders of
warrants reside. Persons holding Warrants who reside in jurisdictions in which
such securities are not qualified and in which there is no exemption will be
unable to exercise their warrants and would either have to sell their warrants
in the open market or allow them to expire unexercised.
Unaffiliated Bankruptcy. A real estate partnership (unaffiliated with the
Company) of which Mr. Stuart, the Chairman, Chief Executive Officer and
principal stockholder of the Company, was a partner, Maze Stone Canyon Estates
Partnership, filed for bankruptcy under Chapter 11 in December 1991 in the
United States Bankruptcy Court, Central District of California (the "Bankruptcy
Court"). The partnership is currently in reorganization pursuant to the Plan of
Reorganization adopted by the Bankruptcy Court in August 1992.
22
<PAGE>
Possible Delisting of Securities from the Nasdaq SmallCap Market; Risks Relating
to Penny Stocks. In order to continue to be listed on the Nasdaq SmallCap
Market, the Company must maintain $2,000,000 in total assets, a $200,000 market
value of the public float and $1,000,000 in total capital and surplus. In
addition, continued inclusion requires two market-makers and a minimum bid price
of $1.00 per share; provided, however, that if the Company falls below such
minimum bid price, it will remain eligible for continued inclusion on the Nasdaq
SmallCap Market if the market value of the public float is at least $1,000,000
and the Company has $2,000,000 in capital and surplus. The Company's stock price
has recently approached or dipped below $1.00 per share. Nasdaq has recently
proposed new maintenance criteria which, if implemented, would eliminate the
foregoing exception to the minimum bid price requirement and require, among
other things, $2,000,000 in net tangible assets, $1,000,000 market value of the
public float and adherence to certain corporate governance provisions. The
failure to meet these maintenance criteria in the future may result in the
delisting of the Company's securities from the Nasdaq SmallCap Market, and
trading, if any, in the Company's securities would thereafter be conducted in
the non-Nasdaq over-the-counter market. As a result of such delisting, an
investor could find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the Company's securities.
In addition, if the Common Stock were to become delisted from trading on the
Nasdaq SmallCap Market and the trading price of the Common Stock were to remain
below $5.00 per share, trading in the Common Stock would also be subject to the
requirements of certain rules promulgated under the Exchange Act, which require
additional disclosure by broker-dealers in connection with any trades involving
a stock defined as a penny stock (generally, any non-Nasdaq equity security that
has a market price of less than $5.00 per share, subject to certain exceptions).
Such rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith, and impose various sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors (generally institutions). For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. The additional burdens imposed upon broker-dealers by such requirements
may discourage broker-dealers from effecting transactions in the Common Stock,
which could severely limit the market liquidity of the Common Stock and the
ability of purchasers in this offering to sell the Common Stock in the secondary
market.
23
<PAGE>
ITEM 2. Description of Property
The Company's corporate headquarters consist of approximately 16,000 square feet
of nondescript office and warehouse space located in an industrial strip mall in
Las Vegas, Nevada. This lease is currently set to expire on August 31, 1999. The
table provided below lists certain information regarding the Company's other
facilities that were in use during 1998.
- - --------------------- ------------ ------------- ----------- ----------------
Square Type of Lease Principal
Location Footage Possession Expiration Function
- - --------------------- ------------ ------------- ----------- ----------------
Atlantic City, NJ 2,000 Lease 09/99 Office
Atlantic City,NJ (1) N/A Lease 06/99 Residential
Branson, MO 27,500 Lease 12/98 Theater/Office
Buena Park, CA (2) 27,599 Lease 06/10 Theater
Kissimmee, FL (3) 31,350 Own N/A Retail
Kissimmee, FL (4) 18,221 Own N/A Theater
Las Vegas, NV (5) 16,000 Lease 08/99 Corporate
Office
Las Vegas, NV (5) 4,668 Lease 03/99 Warehouse
N. Myrtle Beach, SC (6) 15,000 Lease 12/04 Theater/Office
Myrtle Beach, SC (7) 16,171 Own N/A Theater/Office
Orlando, FL 3,640 Lease 06/02 Warehouse
Orlando, FL (8) 10,000 Lease 10/00 Office/Bar
Orlando, FL (9) 15,500 Own N/A Theater
Toronto, ON 9,410 Lease 02/03 Theater
Toronto, ON 627 Lease Month-to-
Month Office
- - --------------------- -------------- ------------ ---------- -----------------
(1) Consists of seven condominium units for use by the Company's performers when
they are performing in the Company's Legends show at Bally's Park Place in
Atlantic City, New Jersey. The Company leases these units from John W. Stuart,
the Chief Executive Officer of the Company, and his wife.
(2) The Company's wholly-owned subsidiary, On Stage Theaters, Inc. ("On Stage
Theaters"), subleases this property from Wild Bill's California, Inc., a
wholly-owned subsidiary of On Stage Theaters. Wild Bill's California, Inc.
leases the property from an unrelated third party.
(3) This property is owned by Fort Liberty, Inc., a wholly-owned subsidiary of
Fort Liberty, Inc.'s ownership is subject to a lien in favor of ICCMIC securing
a loan in the principal amount of $2.7 million. The terms of this loan provide
for monthly interest payments of $21,938, plus monthly principal amortization of
$7,500, commencing April 13, 1999. The loan matures March 16, 2003, at which
time the projected loan balance, assuming no prepayments, of $2.2 million will
be due and payable. The Company has no present plans for the further development
24
<PAGE>
or improvement of the property, beyond ordinary maintenance The property is
taxed at an annual rate of ___% and the annual real property taxes on the
property are approximately $33,400. Depreciation with respect to the building at
the property is taken at a rate of 22,630 under the straight line method over a
30-year estimated life. The occupancy of this mixed-use retail space is
approximately 83% and a restaurant tenant occupies approximately 17% of the
total square footage of the property on a lease and providing for monthly triple
net rent of approximately $7,300. The following is a schedule of the lease
expirations at the property for each of the next 10 years (with none with terms
beyond 2004:
Square Feet Percent of
Year Expiring Annual Rent Total Rent
Month to
Month Leases
1999 8,500 21.29 $ 100,420
2000 4,840 14.52 $ 68,520
2001 3,750 11.26 $ 53,120
2002 11,658 37.27 $ 175,820
2003 750 3.18 $ 15,000
2004 2,669 7.58 $ 35,750
2005 1,500 4.90 $ 23,140
(4) This property is owned by Fort Liberty, Inc., a wholly-owned subsidiary of
On Stage Theaters. On Stage Theaters leases this property from Fort Liberty,
Inc. The lease is for a term of 11 years and provides for monthly rent of
$89,117, plus taxes and utilities. Fort Liberty, Inc.'s ownership is subject to
a lien in favor of ICCMIC securing a loan in the principal amount of $3.9
million. The terms of this loan provide for monthly interest payments of
$31,688, plus monthly principal amortization of $10,833, commencing April 13,
1999. The loan matures March 16, 2003, at which time the projected loan balance,
assuming no prepayments, of $3.38 million will be due and payable. The Company
has no present plans for the further development or improvement of the property,
beyond ordinary maintenance The property is taxed at an annual rate of ___% and
the annual real property taxes on the property are approximately $65,800.
Depreciation with respect to the building at the property is taken at a rate of
$26,568 under the straight line method over a 30-year estimated life.
(5) This lease may be terminated at any time after August 31, 1999 by providing
written notice of such intention.
(6) This property is subleased to Eddie Miles Entertainment.
(7) This property is owned by On State Theaters. On Stage Theaters leases this
property from Surfside Beach, Inc.
25
<PAGE>
(8) On Stage Theaters subleases this property from Blazing Pianos, Inc., a
wholly-owned subsidiary of On Stage Theaters. Blazing Pianos, Inc. leases the
property from an unrelated third party.
(9) This property is owned by King Henry's, Inc., a wholly-owned subsidiary of
On Stage Theaters. On Stage Theaters leases this property from King Henry's,
Inc. The lease is for a term of 11 years and provides for monthly rent of
$67,513, plus taxes and utilities. King Henry's, Inc.'s ownership is subject to
a lien in favor of ICCMIC securing a loan in the principal amount of $5 million.
The terms of this loan provide for monthly interest payments of $40,625, plus
monthly principal amortization of $13,999, commencing April 13, 1999. The loan
matures March 16, 2003, at which time the projected loan balance, assuming no
prepayments, of $4.33 million will be due and payable. The Company has no
present plans for the further development or improvement of the property, beyond
ordinary maintenance The property is taxed at an annual rate of ___% and the
annual real property taxes on the property are approximately $89,850.
Depreciation with respect to the building at the property is taken at a rate of
$44,200 under the straight line method over a 30-year estimated life.
The Company believes that its existing facilities are suitable and adequate for
its current operations and are adequately .
ITEM 3. Legal Proceedings
On September 25, 1998, the Company successfully defended a suit filed against it
in March 1997 by Benny R. Pittman, a shareholder of Grand Strand Entertainment,
Inc. This suit arose out of a dispute relating to the termination of a licensing
agreement between the Company and Mr. Pittman and the control of the Company's
Legends in Concert production in Surfside Beach, South Carolina. While the
Company prevailed on all the counts alleged in the complaint, the Company
stipulated to allow an arbitrator to resolve plaintiffs claim for damages in
quantum meruit; The plaintiffs claim for damages quantum meruit was resolved by
the arbitrator in the favor of the plaintiff for a total of $15,400 in
consideration for services provided to the Company by the plaintiff in
connection with the opening of the Legends production. While it is the Company's
position that any claim Mr. Pittman may have against the Company was fully
adjudicated by the arbitrator as mentioned above, the Company has recently been
informed that Mr. Pittman filed a complaint in South Carolina against the
Company alleging a claim for loss of business opportunities. However, no formal
claim has been filed against the Company to date.
On August 20, 1998, a complaint was filed against the Company by the trustee of
the United States Bankruptcy Court for the District of Nevada, alleging Breach
of Contract, Monies Due and Owing and Turnover of the Property to the Estate.
The basis of the complaint stems from the purchase of certain furniture by third
party while purporting to be a representative of the Company. The Company
believes it has a valid defense for this claim based upon fraud and
misrepresentation. The case is currently in the discovery stage of litigation
and the matter has been set for trial on May 27, 1999.
On May 28, 1998, Silver State Property Management, a Nevada corporation, Roger
A. Bergmann Enterprises, a Nevada corporation, and R.E. Lyle Corp., a Nevada
corporation filed a complaint in the Second Judicial District Court of the State
of Nevada in and for the County of Washoe alleging, among other things, that
John W. Stuart, acting as an agent, Chairman of the Board and Chief Executive
Officer of On Stage Entertainment, Inc., breached an alleged oral agreement to
purchase the Plaintiff's respective interests in the Legends in Concert
26
<PAGE>
production in Hawaii for an aggregate purchase price of $1,000,000. The case is
currently in the discovery stage of litigation and the matter has been set for
trial on September 20, 1999.
On April 21, 1998, the Company filed a Complaint for Declaratory Relief in the
United States District Court for the District of Nevada (the "District Court")
against Hemisphere Tour and Travel, Inc., Richard Winokur, Media Corp. of
America and Stephen Zadrick. The Company filed this Complaint in order to obtain
a declaration by the District Court that the defendants were not entitled to
commissions claimed by the defendants in connection with the Company's
acquisition of Gedco USA, Inc. The defendants counterclaimed, alleging breach of
contract and demanding payment of the disputed commission. This matter has been
stayed by the District Court pending settlement negotiations.
In July 1996, an impersonator of Hank Williams, Sr. who performed for the
Company, filed suit against the Company in the Circuit Court of Taney County,
Missouri. The plaintiff alleges that the Company misappropriated his name, image
and likeness for commercial purposes by taking a photograph of him during a
performance, reproducing such photograph and publishing it in a Company
brochure. The plaintiff is claiming damages in the amount of $2,000,000. The
Company believes that the plaintiff's claim is without merit and intends to
vigorously defend this action. The Company believes that the alleged
appropriation was de minimis and that the plaintiff impliedly consented to the
use of his image in the Company's brochure. During discovery, the plaintiff
agreed to settle this dispute in favor of the Company and the Company agreed to
hire the plaintiff as a consultant for its Branson show. Plaintiff has now
repudiated this settlment agreement and the Company has made a motion to compel
settlement. This motion is currently pending and trial for this matter has been
set for June 7, 1999.
Although the Company believes that it has meritorious defenses with respect to
all of the foregoing matters which it will vigorously pursue, there can be no
assurance that the ultimate outcome of such actions will be resolved favorably
to the Company or that such litigation will not have an adverse effect on the
Company's liquidity, financial condition and results of operation.
ITEM 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of the Company's stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1998.
27
<PAGE>
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
The Common Stock trades on the SmallCap Market segment of the Nasdaq Stock
Market under the symbol "ONST." The following table sets forth, for the periods
indicated, the high and low sales prices as quoted on the Nasdaq Stock Market.
Period High Low
Fiscal 1998:
First Quarter 5.4375 3.50
Second Quarter 5.125 3.625
Third Quarter 4.75 1.75
Fourth Quarter 2.25 1.18
Fiscal 1997:
Third Quarter 5.625 4.50
Fourth Quarter 6.50 3.825
As of April 9, 1999 there were 85 holders of record on the Common Stock. On
April 12, 1999, the closing sale price of the Common Stock as reported by the
Nasdaq stock market was $1.19.
The Company has never declared or paid any cash dividends on its capital stock.
The Company currently intends to retain its earnings to finance future growth
and working capital needs and therefore does not anticipate paying any cash
dividends in the foreseeable future.
ITEM 6. Management's Discussion and Analysis or Plan of Operation
The information appearing in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations" from the portions of
the Company's 1998 Annual Report to Stockholders, filed as Exhibit 13 to this
Form 10-KSB, is incorporated herein by reference to be filed within 120 days of
year-end.
ITEM 7. Financial Statements and Supplementary Data
The information appearing in the section captioned "Financial Statements" from
the portions of the Company's 1998 Annual Report to Stockholders filed as
Exhibit 13 to this Form 10-KSB, are incorporated herein by reference. See "List
of Financial Statements" beginning on page F-1.
ITEM 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
28
<PAGE>
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
Information with respect to this Item will be contained in the Registrant's
Proxy Statement for the 1999 Annual Meeting of Stockholders (the "Proxy
Statement"), which is hereby incorporated herein by reference.
ITEM 10. Executive Compensation
Information with respect to this Item will be contained in the Proxy Statement,
which is hereby incorporated herein by reference.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
Information with respect to this Item will be contained in the Proxy Statement,
which is hereby incorporated herein by reference.
ITEM 12. Certain Relationships and Related Transactions
Subsequent Events
Notes Payable to Principal Stockholder
On March 4, 1999, the Board of Directors authorized a loan in the principal
amount of $100,000 from from John W. Stuart the Company's Chairman, Chief
Executive Officer and Principal Stockholder (the "Stuart Loan"). The Stuart Loan
is evidenced by a one year promissory note bearing an interest rate of twelve
percent (12%) per annum, due on March 3, 2000. In consideration for the Stuart
Loan, the Board of Directors approved the issuance of warrants to purchase
100,000 shares of the Company's common stock at a price of $1.00 per share, the
market price on the closing date of the Stuart Loan. Additionally, the Company
agreed to pay legal fees incurred by Mr. Stuart in connection with this
transaction.
On April 5, 1999, Mr. Suart agreed to extend a bridge loan in an aggregate
principal amount not to exceed $500,000 to the Company. As of April 15, 1999,
the Company had reported $200,000 of hte funds available at a rate of twelve
percent (12%) interest per annum. Outstanding unpaid principal and interest are
due April 4, 2000. The Company paid an origination fee of five percent (5%) of
the principal amount of the loan. Note Receivable from Chief Financial Officer
On April 13, 1999, the Company loaned $63,213 to Kiran Sidhu, the Company's
Senior Vice President and Chief Financial Officer, to assist Mr. Sidhu with
satisfying personal income taxes incurred as a result of the issuance of 40,532
shares of the Company's Common Stock in accordance with the terms of Mr. Sidhu's
employment agreement with the Company (the "Sidhu Note"). The Sidhu Note, which
recently matured on April 12, 1999, is secured by Mr. Sidhu's 40,532 shares of
the Company's Common Stock. Mr. Sidhu has recently requested that the Company
extend the maturity date of the Sidhu Note through to December 31, 1999, due
primarily to the fact that he does not have the money to repay the Sidhu Note,
coupled with the fact that the Common Stock which secures the repayment of the
Sidhu Note is not enough to satisfy the outstanding debt since the Common Stock
has declined in value from $5.00 per share when issued, to approximately $1.00
per share as of the maturity date.
29
<PAGE>
Re-Purchase of Common Stock and Resale Interactive Events, Inc.
On February 23, 1999, the Company entered into a Common Stock Purchase Agreement
(the "Agreement") with Richard S. Kanfer, the Company's former Vice President of
Sales ("Kanfer"), pursuant to which the parties agreed to re-convey unwind the
November 19996 acquisition by the Company of Interactive Events, Inc., a Georgia
corporation ("Interactive Events") owned by Kanfer. The Company agreed under the
Agreement to all of the assets of Interactive Events, Inc. to Kanfer, in
consideration for the reconveyance by Kanfer of 30,304 shares of the Company's
Common Stock valued at $___ per share, a non-plan option to purchase 15,000
shares of the Company's Common Stock and incentive stock options to purchase
19,835 shares of the Company's Common Stock at a price of $____ per share. In
addition, the parties agreed to release one other from any liability arising out
of the November 1996 acquisition of Interactive Events, Inc. by the Company and
any claim relating to Kanfer's subsequent employment with the Company. The
Company and Kanfer also entered into a exclusive right of representation
agreement in February 1999, pursuant to which the Company granted to Kanfer the
right to represent its' Legends production in designated areas in conversion of
a portion of the gross proceeds generated thereby.
Information with respect to this Item will be contained in the Proxy Statement,
which is hereby incorporated herein by reference.
ITEM 13. Exhibits & Reports on Form 8-K
(a) Exhibits
The following is a list of exhibits filed as part of this annual report on Form
10-KSB. Where so indicated by footnote, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the location
of the exhibit in the previous filing is indicated parenthetically except in
those situations where the exhibit number was the same as set forth below.
30
<PAGE>
Exhibit
Number Description
3.1 Articles of Incorporation of the Registrant (1)
3.2 Bylaws of the Registrant (3)
4.1 Specimen stock certificate representing the Common Stock (3)
4.2 Specimen warrant certificate representing the Warrants (3)
4.3 Form of Public Warrant Agreement (3)
4.4 Form of Underwriter's Warrant Agreement (3)
10.1 Employment Agreement between the Registrant and John W. Stuart (1)
10.2 Employment Agreement between the Registrant and David Hope (1)
10.3 Employment Agreement between the Registrant and Kiranjit S. Sidhu (1)
10.4 Confidentiality and Non-Competition Agreement between the Registrant
and John W. Stuart (1)
10.5 Confidentiality and Non-Competition Agreement between the Registrant
and David Hope (1)
10.6 Confidentiality and Non-Competition Agreement between the Registrant
and Kiranjit S Sidhu (1)
10.7 Amended and Restated 1996 Stock Option Plan (1)
10.8 Contribution Agreement between the Registrant and John W. Stuart (1)
10.9 Security and Pledge Agreement between the Registrant and John W.
Stuart relating to contribution of LVHE shares (1)
10.10 Security and Pledge Agreement between the Registrant and John W. Stuart
relating to LVHE litigation indemnity (1)
10.11 Indemnification Agreement between the Registrant, John W. Stuart and
Grand Strand Entertainment, Inc. (1)
10.12 Security and Pledge Agreement between the Registrant and John W.
Stuart relating to Grand Strand Entertainment, Inc. litigation
indemnity (1)
10.13 Promissory Note to John Stuart dated March 4, 1999+
10.14 Entertainment Production Agreement between the Registrant, Imperial
Palace, Inc. and John W. Stuart dated December, 1995 (3) (Filed in
redacted form pursuant to Rule 406 promulgated under the Securities
Act. Filed separately in unredacted form subject to a request for
confidential treatment pursuant to Rule 406 under the Securities Act.)
10.15 Agreement between the Registrant and Bally's Park Place, Inc. dated
September 1, 1994 and subsequent renewal letters (3) (Filed in redacted
form pursuant to Rule 406 promulgated under the Securities Act. Filed
separately in unredacted form subject to a request for confidential
treatment pursuant to Rule 406 under the Securities Act.)
10.16 Common Stock Purchase Agreement between Registrant and Interactive
Events, Inc. (2) (Exhibit No. 10.18)
10.17 (a) Show Production Agreement between the Registrant and Kurz
Management (3) (Exhibit No. 10.19)
10.18 Portions of 1998 Annual Report to Stockholders+ 10.19 Promissory Note
to John Stuart dated April 5, 1999+ 10.20 First Security Bank
Agreement+
10.21 Common Stock Purchase Agreement with Whale Securities dated
December 1998+
10.22 Common Stock Purchase Agreement between On Stage Entertainment, Inc.
and Richard S. Kanfer+
13 Management's Discussion and Analysis of Financial Condition and Results
of Operations; Report on Audited Consolidated Financial Statements For
the Years Ended December 31, 1997 and 1998
21 Subsidiaries of the Registrant+
27 Financial Data Schedule+
- - ------------------
+ Filed herewith.
(1) Filed as an exhibit to the Company's Registration Statement on Form SB-2 on
April 7, 1997 (Registration No. 333-24681).
(2) Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 on June 3, 1997(Registration No. 333-24681)
(3) Filed as an exhibit to Amendment No. 3 to the Company's Registration
Statement on Form SB-2 on August 6,1997 (Registration No. 333-24681)
(4) Reports on Form 8-K
Reports on Form 8-K were filed by the Company on October 6, 1998 and on November
16, 1998. The reports contained information regarding the Company's Country
Tonight and Proforma Gedco, respectively and contained the following financial
statements:
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ON STAGE ENTERTAINMENT, INC.
(Registrant)
Dated: April 15, 1999 By: /s/ John W. Stuart
-----------------------------
John W. Stuart, Chairman of the Board
and Chief Executive Officer
32
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
----------- ------- --------
/s/ John W. Stuart Chairman and Chief Executive April 15, 1999
- - --------------------- Officer and Director
John W. Stuart (principal executive officer)
/s/ David Hope President, Chief Operating April 15, 1999
- - --------------------- Officer and Director
David Hope
/s/ Kiranjit S. Sidhu Chief Financial Officer (principal April 15, 1999
- - --------------------- financial and accounting officer)
Kiranjit S. Sidhu and Treasurer
/s/ Mel Woods Director April 15, 1999
- - ---------------------
Mel Woods
Director
- - ---------------------
Mark S. Karlan
/s/ Matthew Gohd Director April 15, 1999
- - ---------------------
Matthew Gohd
/s/ James L. Nederlander Director April 15, 1999
- - -----------------------
James L. Nederlander
Director
- - ----------------------
Mark Tratos
33
<PAGE>
PROMISSORY NOTE
- - --------------------------------------------------------------------------------
MAKER: Principal Amount:
ON STAGE ENTERTAINMENT, INC., $ 100,000.00
a Nevada corporation.
Effective Date:
March 4, 1999
HOLDER: Maturity Date:
JOHN W. STUART, an individual March 3, 2000
- - --------------------------------------------------------------------------------
FOR VALUE RECEIVED, On Stage Entertainment, Inc., a Nevada corporation ("Maker")
hereby promises to pay to the order of John W. Stuart ("Holder"), the principal
sum of ONE HUNDRED THOUSAND DOLLARS ($100,000.00) plus interest on the unpaid
principal balance of this Promissory Note, as provided for below, until paid in
full in lawful money of the United States.
1. Interest. The outstanding principal amount shall bear simple interest at a
rate equal to twelve percent (12%) per annum. The rate of interest applicable
hereunder shall be calculated on the basis of actual days elapsed over a 365-day
year.
2. Terms and Conditions of Payment(s). On or before the Maturity Date (as
defined below), Maker shall pay Holder all accrued but unpaid interest along
with the outstanding principal balance.
3. Maturity Date. "Maturity Date" shall be one year from the date of issuance.
4. Application of Payments. Maker reserves the right to prepay all or any
portion of the principal due upon this note. All payments under this Promissory
Note shall be applied first to any costs, expenses and charges then due and
payable by Maker, second to accrued but unpaid interest, and then to outstanding
principal.
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5. Defaults; Remedies.
(a) This Promissory Note shall be in default if (i) any payment due under this
Promissory Note is not made when due, or (ii) the Maker fails or refuses to
perform any other obligation under this Promissory Note and such non-performance
is continuing for more than ten (10) days after the giving of written notice by
Holder.
(b) Upon default, Holder shall have all the rights and remedies available to it
under this Promissory Note and applicable law, and shall have the right to
declare all or part of the principal and accrued interest under this Promissory
Note immediately due and payable.
(c) The remedies of Holder as provided for herein, or at law or in equity, shall
be cumulative and concurrent, and may be pursued singly, successfully, or
together at the sole discretion of Holder, and may be exercised as often as
occasion therefore shall occur; and the failure to exercise any such right or
remedy shall in no event be construed as a waiver or release thereof.
6. Set-Off. Holder shall have the right to set-off an amount equal to the sum of
(i) the outstanding principal plus (ii) the accrued but unpaid interest, each
due and owing to Holder under this Promissory Note, against any payment due and
owing from Maker to Holder.
7. Waiver. Maker hereby waives presentment, notice of non-payment, dishonor,
notice of dishonor, protest, notice of protest, demand and all other notices in
connection with the delivery, acceptance, performance, default or enforcement of
this Promissory Note. Holder shall not be deemed, by any act of omission or
commission, to have waived any of its rights or remedies hereunder unless such
waiver is in writing and signed by the Holder and then only to the extent
specifically set forth in writing. A waiver with reference to one event shall
not be construed as continuing or as a bar to or waiver of any right or remedy
as to a subsequent event. No delay or omission of the Holder to exercise any
right, whether before or after a default hereunder, shall impair any such right
or shall be construed to be a waiver of any right or default, and the acceptance
at any time by the Holder hereof of any past-due amounts shall not be deemed to
be a waiver of the right to require prompt payment when due of any other amounts
then or thereafter due and payable. All payments by Maker shall be made without
set-off or counterclaim.
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8. Notices. Any notice, consent, approval, request, demand or other
communication required or permitted hereunder must be in writing to be effective
and shall be deemed delivered and received when: (a) Personally delivered or if
delivered by facsimile, when electronic confirmation is actually received by the
party to whom notice was sent, or (b) If delivered by mail whether actually
received or not, at the close of business on the third (3rd) business day
following a day when placed in the United States Mail, postage prepaid,
certified or registered mail, return receipt requested, at the addresses set
forth below (or to such other address as any party shall specify by written
notice so given), and shall be deemed to have been delivered as of the date so
personally delivered or mailed.
The address of Maker for purposes of this paragraph is as follows:
On Stage Entertainment, Inc.
4625 W. Nevso, Suite 9
Las Vegas, Nevada 89103
Address for Holder shall be as follows:
John W. Stuart
8213 Rancho Destino
Las Vegas, Nevada 89123
9. Attorneys' Fees. Maker promises to pay costs of collection, including
attorneys; fees, whether or not suit is filed, upon the non-performance by Maker
of any duty or obligation arising out of or in connection with this Promissory
Note.
10. Severability. If for any reason whatsoever, any one or more of the
provisions of this Promissory Note shall be held or deemed to be illegal,
inoperative, unenforceable or invalid as applied to any particular case or in
all cases, such circumstances shall not have the effect of rendering such
provision illegal, inoperative, unenforceable or invalid in any other case or of
rendering any other provisions of the Promissory Note illegal, inoperative,
unenforceable or invalid.
11. Governing Law. This Promissory Note, and all questions relating to its
validity, interpretation, performance and enforcement (including, but not
limited to, provisions concerning limitations of action), shall be governed by
and construed in accordance with the laws of the State of Nevada.
12. Assignment. Maker shall not assign, sell or transfer any or all of its
obligations under this Promissory Note without the prior written consent of the
Holder.
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13. Binding Effect. This Promissory Note shall be binding upon the successors,
heirs, executors, administrators and assigns of Maker and shall inure to the
benefit of Holder, its successors, endorsees and assigns.
14. Modification. No change or modification of this Promissory Note shall be
valid unless the same be made in writing and signed by all parties hereto.
15. Captions. The captions contained herein are not a part of this Promissory
Note. They are only for the convenience of the parties and do not in any way
modify, amplify or give full notice of any of the terms, covenants or conditions
of this Promissory Note.
16. Construction. For purposes of this Promissory Note, the language of the
contract shall be deemed to be the language of both parties and neither party
shall be construed as the drafter.
By:/s/ Kiran Sidhu
-------------------------------
Kiran Sidhu, Chief Financial Officer
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PROMISSORY NOTE
- - --------------------------------------------------------------------------------
MAKER: Principal Amount:
ON STAGE ENTERTAINMENT, INC., $ 200,000.00
a Nevada corporation.
Effective Date:
April 5, 1999
HOLDER: Maturity Date:
JOHN W. STUART, an individual April 4, 2000
- - --------------------------------------------------------------------------------
FOR VALUE RECEIVED, On Stage Entertainment, Inc., a Nevada corporation ("Maker")
hereby promises to pay to the order of John W. Stuart ("Holder"), the principal
sum of TWO HUNDRED THOUSAND DOLLARS ($200,000.00) plus interest on the unpaid
principal balance of this Promissory Note, as provided for below, until paid in
full in lawful money of the United States.
1. Interest. The outstanding principal amount shall bear simple interest at a
rate equal to twelve percent (12%) per annum. The rate of interest applicable
hereunder shall be calculated on the basis of actual days elapsed over a 365-day
year.
2. Terms and Conditions of Payment(s). On or before the Maturity Date (as
defined below), Maker shall pay Holder all accrued but unpaid interest along
with the outstanding principal balance.
3. Maturity Date. "Maturity Date" shall be one year from the date of issuance.
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4. Application of Payments. Maker reserves the right to prepay all or any
portion of the principal due upon this note. All payments under this Promissory
Note shall be applied first to any costs, expenses and charges then due and
payable by Maker, second to accrued but unpaid interest, and then to outstanding
principal.
5. Default; Remedies.
(a) This Promissory Note shall be in default if (i) any payment due under this
Promissory Note is not made when due, or (ii) the Maker fails or refuses to
perform any other obligation under this Promissory Note and such non-performance
is continuing for more than ten (10) days after the giving of written notice by
Holder.
(b) Upon default, Holder shall have all the rights and remedies available to it
under this Promissory Note and applicable law, and shall have the right to
declare all or part of the principal and accrued interest under this Promissory
Note immediately due and payable.
(c) The remedies of Holder as provided for herein, or at law or in equity, shall
be cumulative and concurrent, and may be pursued singly, successfully, or
together at the sole discretion of Holder, and may be exercised as often as
occasion therefore shall occur; and the failure to exercise any such right or
remedy shall in no event be construed as a waiver or release thereof.
6. Set-Off. Holder shall have the right to set-off an amount equal to the sum of
(i) the outstanding principal plus (ii) the accrued but unpaid interest, each
due and owing to Holder under this Promissory Note, against any payment due and
owing from Maker to Holder.
7. Waiver. Maker hereby waives presentment, notice of non-payment, dishonor,
notice of dishonor, protest, notice of protest, demand and all other notices in
connection with the delivery, acceptance, performance, default or enforcement of
this Promissory Note. Holder shall not be deemed, by any act of omission or
commission, to have waived any of its rights or remedies hereunder unless such
waiver is in writing and signed by the Holder and then only to the extent
specifically set forth in writing. A waiver with reference to one event shall
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not be construed as continuing or as a bar to or waiver of any right or remedy
as to a subsequent event. No delay or omission of the Holder to exercise any
right, whether before or after a default hereunder, shall impair any such right
or shall be construed to be a waiver of any right or default, and the acceptance
at any time by the Holder hereof of any past-due amounts shall not be deemed to
be a waiver of the right to require prompt payment when due of any other amounts
then or thereafter due and payable. All payments by Maker shall be made without
set-off or counterclaim.
8. Notice. Any notice, consent, approval, request, demand or other communication
required or permitted hereunder must be in writing to be effective and shall be
deemed delivered and received when: (a) Personally delivered or if delivered by
facsimile, when electronic confirmation is actually received by the party to
whom notice was sent, or (b) If delivered by mail whether actually received or
not, at the close of business on the third (3rd) business day following a day
when placed in the United States Mail, postage prepaid, certified or registered
mail, return receipt requested, at the addresses set forth below (or to such
other address as any party shall specify by written notice so given), and shall
be deemed to have been delivered as of the date so personally delivered or
mailed.
The address of Maker for purposes of this paragraph is as follows:
On Stage Entertainment, Inc.
4625 W. Nevso, Suite 9
Las Vegas, Nevada 89103
Address for Holder shall be as follows:
John W. Stuart
8213 Rancho Destino
Las Vegas, Nevada 89123
9. Attorneys' Fees. Maker promises to pay costs of collection, including
attorneys; fees, whether or not suit is filed, upon the non-performance by Maker
of any duty or obligation arising out of or in connection with this Promissory
Note.
10. Severability. If for any reason whatsoever, any one or more of the
provisions of this Promissory Note shall be held or deemed to be illegal,
inoperative, unenforceable or invalid as applied to any particular case or in
all cases, such circumstances shall not have the effect of rendering such
provision illegal, inoperative, unenforceable or invalid in any other case or of
rendering any other provisions of the Promissory Note illegal, inoperative,
unenforceable or invalid.
11. Governing Law. This Promissory Note, and all questions relating to its
validity, interpretation, performance and enforcement (including, but not
limited to, provisions concerning limitations of action), shall be governed by
and construed in accordance with the laws of the State of Nevada.
12. Assumption. Maker shall not assign, sell or transfer any or all of its
obligations under this Promissory Note without the prior written consent of the
Holder.
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13. Binding Effect. This Promissory Note shall be binding upon the successors,
heirs, executors, administrators and assigns of Maker and shall inure to the
benefit of Holder, its successors, endorsees and assigns.
14. Modification. No change or modification of this Promissory Note shall be
valid unless the same be made in writing and signed by all parties hereto.
15. Captions. The captions contained herein are not a part of this Promissory
Note. They are only for the convenience of the parties and do not in any way
modify, amplify or give full notice of any of the terms, covenants or conditions
of this Promissory Note.
16. Construction. For purposes of this Promissory Note, the language of the
contract shall be deemed to be the language of both parties and neither party
shall be construed as the drafter.
By: /s/ Kiran Sidhu
----------------------------------
Kiran Sidhu, Chief Financial Officer
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First Security Bank
March 24, 1999
On Stage Entertainment
4625 W. Nevso Dr., # 10
Las Vegas, NV 89103
Attn: David Hope, President
Mr. Hope,
Based on the statements and representations in your Financial Statements and the
supplementary exhibits presented, First Security Bank of Nevada (herein "FSBN")
has approved the following options in to convert your line of credit to a term
note. The loan is subject to the terms and conditions set forth as follows:
1. BORROWER: On Stage Entertainment Inc., fka Legends in Concert, Inc.
2. GUARANTOR: John W. Stuart
3. SECURITY:
UCC-1 Financing Statements/Security Agreement on all fixtures, furniture and
equipment in Georgia, North Carolina, New Jersey, South Carolina, Missouri and
Nevada. This is cross-collateralization with First Security Leasing obligations.
4. PRINCIPAL AMOUNT: An amount not to exceed 899,679.16.
5. INTEREST RATE:
Option One
The rate on the loan principal shall be at a variable rate of interest equal to
Three Percent (3%) above the FSBN Prime Rate. First Security Bank's "prime rate"
is its announced rate of interest used as a reference point from which it may
calculate the cost of credit to customers. It is subject to change from time to
time. FSBN may make loans bearing interest above, at, or below its prime rate.
TERM: Seven (7) Months
Option Two
The rate on the loan principal shall be at a variable rate of interest equal to
Four Percent (4%) above the FSBN Prime Rate. First Security Bank's "prime rate"
is its announced rate of interest used as a reference point from which it may
calculate the cost of credit to customers. It is subject to change from time to
time. FSBN may make loans bearing interest above, at, or below its prime rate.
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TERM: Nine (9) Months
6. DEFAULT INTEREST RATE During the period of any default under the terms of the
note securing the indebtedness, interest on the entire indebtedness then
outstanding shall be charged, without notice to any borrower, at the rate of two
percent (2%) per annum higher than the contract rate stipulated above
(hereinafter referred to as the "Default Rate").
7. LATE CHARGE: In the event any payment required hereunder is received by FSBN
fifteen (15) days after its due date, the late charge of Five percent (5%) of
each overdue required payment (whether at the note rate or default rate) shall
be charged for the purpose of defraying the expenses incident to handling said
delinquent payment(s).
8. RESTRICTION ON USE OF FUNDS Conversion of Line of Credit to a Term Note
(Options noted above)
9. LOAN CHARGE One percent (1%) of the principal amount prorated to the term of
the note selected from the options. The fee is due and payable with the executed
loan documents and is non-refundable
10. MONTHLY PAYMENTS: Monthly payments of principal plus interest based on a
seven or nine month amortization, from the options noted above.
11. PREPAYMENT PENALTY: None.
12. DOCUMENTATION: The loan shall be evidenced by a Promissory Note to a form
satisfactory to FSBN signed by each of the persons to whom the commitment is
addressed and other persons designated in the commitment letter. This Promissory
Note shall be secured by an appropriate Security Instrument selected by FSBN,
and executed by all persons deemed by FSBN to have an interest in the
collateral.
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All of the foregoing documents, and all other instruments which FSBN shall
require to consummate the loan, shall be in a form prepared by or satisfactory
to FSBN.
14. BOOKS AND RECORDS, FINANCIAL STATEMENTS:
(A) In making this loan commitment, FSBN is relying on the financial condition
of the borrower and any and all guarantors as represented in the application,
and any supporting documents. If the security is income producing, FSBN is also
relying on the security to generate records and accounts and to make such copies
of the extracts thereof as FSBN shall desire.
(B) BORROWER'S FINANCIAL STATEMENTS: During the term of the loan, borrower
and/or co-borrower must furnish or cause to be furnished to FSBN, within ninety
(90) days of the close of their respective fiscal years, the current signed
financial statements (annual balance sheet and profit and loss statement) of
each person or entity (borrower/co-borrower), as having been prepared in
accordance with generally accepted accounting principles consistently applied.
15. MISCELLANEOUS.
(A) Time shall be of the essence in this commitment. No waiver of any of the
terms and provisions of this commitment, and no waiver of any default or failure
to comply with the commitment shall be effective unless made by FSBN in writing.
All notices shall be in writing.
(B) So long as this commitment remains in force and effect, FSBN shall have the
right to demand complete financial statements of any or all persons to be
obligated to FSBN under this commitment.
(C) This commitment is conditioned upon continuation of the assets, liquidity,
net worth and credit standing of all persons to be obligated to FSBN at
substantially as favorable a level as disclosed initially by the financial
statements and other credit information submitted to FSBN.
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(D) If some of the borrowers, guarantors, or other persons obligated to FSBN
under this commitment are a corporation, partnership, estate, joint venture, or
other legal entity, then prior to closing FSBN shall be provided with
appropriate resolutions or satisfactory evidences of authority, including an
opinion of counsel documenting the right of the individuals acting for or on
behalf of the entity to so act and bind the entity. Moreover, FSBN must receive
satisfactory written evidence that any such entity is legally constituted and is
permitted to transact business in the jurisdiction in which the security is
situated.
(E) Reference herein matters being to the satisfaction of FSBN shall include the
satisfaction of any legal course) engaged by FSBN.
(F) This commitment in which the provisions hereof are incorporated supersedes
any and all other commitments, agreements, provisions, offers and statements
whether written or oral, made by FSBN or anyone acting with its authorization.
No change, amendment or modification hereof shall be valid unless made in
writing and signed by a duly authorized officer of FSBN.
(G) Borrower authorizes FSBN to use borrower's name and provide any information
regarding borrower in all reports required by any governmental body regulating
FSBN.
(H) Borrower represents that there is no litigation, legal or administrative
proceeding, investigation or other action of any nature pending or to the
knowledge of borrower, threatened against or affecting the borrower which has
not been disclosed to FSBN and which may involved the possibility of any
judgment or liability not fully covered by insurance; materially or adversely
affect any of the assets of the borrower or their right to carry on business as
now conducted; or affect the continued employment of any officer, director or
employee of borrower.
(I) Borrower and each guarantor hereby separately warrant to FSBN that all
representations, circumstances, accounts, reports and all other information
supplied to FSBN in connection with this loan are true and accurate in al
material respects. Borrower and each guarantor agree that each separate warranty
shall survive the closing of the loan and further agree to notify FSBN of any
material change in any of the information submitted to FSBN.
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16. CANCELLATION AND TERMINATION OF COMMITMENT BY FSBN.
FSBN reserves the right to cancel this commitment and to terminate its
obligations thereunder at any time in any of the following circumstances:
(A) Failure of the borrower to comply with any of the provisions or conditions
of the commitment; or
(B) Nonpayment within the prescribed time of any fees or expenses called for in
the commitment; or
(C) Insufficiency of title or failure of FSBN to approve either the state of
title to the security or any loan documents to it; or
(D) Damage to the improvements which has not been repaired or restored to the
satisfaction of FSBN or for which satisfactory provisions for repair or
restoration have not been made at the time FSBN is called upon to act pursuant
to this commitment; or
(E) The filing by or against any borrowers, owners, or other persons required to
execute any of the loan documents of any petition in bankruptcy, receiver or
trustee or any assignment or arrangement for the benefit of creditors, which
petition, appointment, assignment or arrangement is not withdrawn, dismissed,
cancelled, or terminated prior to the expiration of this commitment; or
(F) Any change subsequent to the date of this commitment reasonably deemed by
FSBN to be a material or substantial adverse change in the assets, liquidity,
net worth or credit standing of any borrower or other person who shall become
obligated to FSBN under this commitment; or
(G) The taking of a judgment against any borrower or guarantor which involves
liability not covered by insurance.
17. ACCEPTANCE. An executed copy of the commitment shall be received by FSBN on
or before March 25, 1999. In the event an accepted copy of the commitment has
not been received by FSBN on or before April 10, 1999, the commitment shall be
deemed to have lapsed and FSBN shall have no further obligation under this
commitment. If this commitment is accepted as specified, all funds and documents
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necessary to consummate the loan must be filed of record no later than April 10,
1999, unless an extension is agreed to in writing by First Security Bank of
Nevada.
In the event this commitment expires, or the loan is not closed, borrower shall
pay all costs, expenses and fees required by FSBN.
18. APPLICABILITY OF TERMS AND CONDITIONS. All terms and conditions of this
commitment letter shall remain in full force and effect through the term of the
loan contemplated by this commitment.
19. APPLICABLE GOVERNING LAW. The laws of the State of Nevada shall govern the
terms and conditions of this agreement and the loan contemplated hereby.
Very truly yours,
First Security Bank of Nevada
/S/ Carla C. Urwin
- - -------------------------------------
Carla C. Urwin
VP/Manager
Green Valley Business Financial Center
- - -------------------------------------------
Commitment Letter dated March 24, 1999
TO: First Security Bank of Nevada DATE: March 29, 1999
The undersigned hereby accept the foregoing offer. We acknowledge that we have
read and understand the foregoing, and that a loan pursuant thereto shall be
subject to the conditions described above.
We do hereby warrant that all facts and circumstances pertaining to the loan are
as represented by us.
BORROWER
/S/ John W. Stuart
- - --------------------------------------
John W. Stuart
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ON STAGE ENTERTAINMENT, INC.
COMMON STOCK PURCHASE AGREEMENT
This Common Stock Purchase Agreement (the "Agreement") is made on December __,
1998 by and between On Stage Entertainment, Inc., a Nevada corporation having
its principal place of business at 4625 West Nevso Drive, Las Vegas, Nevada
89103 (the "Company"), Whale Securities Co., L.P. a New York limited partnership
having its principal place of business at 550 Fifth Avenue, New York, New York
10019 ("Whale") and Elliot Broidy, Arthur Goldberg, Joseph E. Haick, William G.
Walters, Ronald Nash, Jeffrey Silverman, John Pappajohn, Forstmann Partners,
L.P., Mark Siegel, Matthew Gohd, Allan Siemons, Joseph W. McSherry, Robert
Mittman, Robert Toricelli, Julie T. McMahon, Anthony Forstmann and Eamon Twomey
(each individually, a "Customer," and, collectively, the "Customers").
The parties hereto agree as follows:
1. Authorization and Sale.
1.1 Authorization; Sale of Shares. Subject to the terms and conditions hereof,
the Company has authorized the sale and issuance to Whale, as agent for the
Customers, of 150,000 shares (the "Shares") of its common stock, par value $.01
per share (the "Common Stock"), at an aggregate purchase price of $100,000 (the
"Purchase Price") in the amounts and for the prices set forth on Exhibit A, a
true and correct copy of which is attached hereto.
1.2 Closing. At the Closing (as defined below), the Company shall sell to Whale,
as agent for the Customers, and Whale shall purchase from the Company, and the
Company shall issue to either Whale or to the Customers, individually, as Whale
may specify, the Shares. The closing of the purchase and sale of the Shares to
Whale, as agent for the Customers, from the Company under this Agreement shall
take place at the offices of the Company at such time, date and location as the
Company and Whale may mutually agree (the "Closing"). Notwithstanding anything
in this Agreement to the contrary, the Closing shall occur no later than 5:00
p.m. PST _________________. At the Closing, the Company will deliver to Whale,
or to the Customers, individually, as Whale may specify, certificates
representing the Shares registered in the name of the Customers, individually,
as set forth on Exhibit A, against delivery of a check or checks payable to the
order of the Company, or a transfer of funds to the account of the Company by
wire transfer, representing the Purchase Price.
2. Representations and Warranties of the Company. The Company represents and
warrants to the Customers as of the date hereof as follows:
2.1 Organization and Standing. The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the State
of Nevada and a copy of the Company's Articles of Incorporation and Bylaws are
attached as Exhibit A and Exhibit B, respectively.
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2.2 Corporate Power; Authorization. The Company has all requisite legal and
corporate power and has taken all requisite corporate action to execute and
deliver this Agreement, to sell the Shares to Whale, as agent for the Customers,
and to carry out and perform all of its obligations hereunder. This Agreement
has been duly authorized, executed and delivered on behalf of the Company and
constitutes the valid and binding agreement of the Company, enforceable in
accordance with its terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization or similar laws relating to or affecting the
enforcement of creditors' rights generally and (ii) as limited by equitable
principles generally. The consummation of the transactions contemplated herein
and the fulfillment of the terms hereof will not result in a breach of any of
the terms or provisions of, or constitute a default under, the Company's
Articles of Incorporation, the Company's bylaws, or any material indenture,
mortgage, deed of trust or other agreement or instrument to which the Company is
a party or by which it or its properties is bound.
2.3 Shares. The Company has full corporate power and lawful authority to sell
the Shares to Whale, as agent for the Customers, on the terms and conditions
contemplated herein, and when so sold against payment therefor as provided
herein, the Shares will be validly authorized and issued, fully paid and
nonassessable. The issuance and delivery of the Shares are not subject to
preemptive or any similar rights of the shareholders of the Company or any liens
or encumbrances arising through the Company.
2.4 Subsidiaries. Except as set forth on Schedule 2.4 of this Agreement, the
Company has no direct or indirect subsidiaries. The Company does not, directly
or indirectly, own or control or have any capital or other equity interest or
participation in any other entity.
2.5 Title to Assets and Leasehold Interest. The Company has good and marketable
title to all the assets it uses regularly in the conduct of its business, and
has good title to all of its leasehold interests.
2.6 Liabilities, Indebtedness. Except as disclosed on the balance sheet of the
Company as of September 30, 1998, a copy of such balance sheet has been
previously delivered to Whale, which in turn previously delivered it to each
Customer, the Company has no liabilities which are in the aggregate material to
the business or financial condition of the Company.
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2.7 Compliance with Other Instruments and Laws. To the best of its knowledge,
the Company is not in violation or breach of any term of its Articles of
Incorporation, by-laws or any judgment or decree, nor has it received any notice
concerning a breach of any material contract, nor is the Company in violation of
any order, statute, rule or regulation applicable to the Company, its business
or properties. The execution, delivery and performance of this Agreement has not
and will not cause any such violation or breach.
2.8 Tax Returns and Payments. All federal, state, and local income tax returns
of the Company required by law to be filed have been filed, and the Company has
paid all federal, state and local income taxes shown thereon as owing, except
where the failure to file any such return or to pay such income tax would not
have a material adverse effect on the financial condition of the Company.
3. Representations and Warranties of Whale. Whale hereby represents and warrants
to the Company as of the date hereof as follows:
3.1 Organization and Standing. Whale has been duly organized and is validly
existing as a limited partnership in good standing under the laws of the State
of New York.
3.2 Investment Experience. Whale believes that it has received all the
information it considers necessary or appropriate to enable it to decide whether
to purchase the Shares, as agent for the Customers. Whale has had an opportunity
to become aware of the Company's business affairs and financial condition, has
had an opportunity to ask questions and receive answers, review documents and
gather information about the Company and has acquired sufficient information
about the Company to reach an informed and knowledgeable decision to purchase
the Shares, as agent for the Customers. Whale has such business and financial
experience as is required to give it the capacity to protect its own interests
in connection with the purchase of the Shares, as agent for the Customers, and
can bear the economic risk of such purchase.
3.3 Restricted Securities. Whale understands that the Shares have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
or registered or qualified under any state securities law in reliance on
specific exemptions therefrom. Whale is familiar with Rule 144 under the
Securities Act, as presently in effect, and understands the resale limitations
imposed thereby and by the Securities Act.
3.4 No Legal, Tax or Investment Advice. Whale understands that nothing in this
Agreement or any other materials presented to Whale in connection with the
purchase and sale of the Shares constitutes legal, tax or investment advice.
Whale has consulted such legal, tax and investment advisors as it, in its sole
discretion, has deemed necessary or appropriate in connection with its purchase
of the Shares, as agent for the Customers.
3
<PAGE>
3.5 Corporate Power; Authority. Whale has all requisite legal and corporate
power and has taken all requisite corporate action to execute, deliver and
perform its obligations under this Agreement. This Agreement has been duly
authorized, executed and delivered on behalf of Whale and constitutes the valid
and binding agreement of Whale, enforceable in accordance with its terms, except
(i) as limited by applicable bankruptcy, insolvency, reorganization or similar
laws relating to or affecting the enforcement of creditors' rights generally and
(ii) as limited by equitable principles generally.
4. Representations, Warranties and Covenants of the Customers
Each Customer represents and warrants as follows:
4.1 (i) the Customer understands that the Shares have not been registered under
the Securities Act or the securities laws of any state, based upon an exemption
from such registration requirements, (ii) the Shares are and will be "restricted
securities," as said term is defined in Rule 144 of the Rules and Regulations
promulgated under the Securities Act, (iii) the Shares may not be sold or
otherwise transferred unless they have been first registered under the
Securities Act and all applicable state securities laws, or unless exemptions
from such registration provisions are available with respect to said sale or
transfer, (iv) except as set forth herein, neither the Company, nor any other
person or entity is under any obligation to register the Shares, under the
Securities Act or any state securities laws, or to take any action to make any
exemption from any such registration provisions available, (v) the certificates
for the Shares will bear a legend to the effect that the transfer of the
securities represented thereby is subject to the foregoing restrictions on
transfer under the Securities Act, (vi) stop transfer instructions with respect
to the restrictions on transfer under the Securities Act will be placed with the
transfer agent for the Common Stock regarding the Shares, and (vii) the Customer
may be required to hold the Shares for an indefinite period;
4.2 The Customer has had access to the Company's Prospectus dated August 13,
1997 and all reports filed by the Company with the Securities and Exchange
Commission ("SEC") after August 13, 1997;
4.3 The Customer has had a reasonable opportunity to ask questions of the
Company concerning the Company and all such questions, if any, have been
answered to the full satisfaction of the Customer;
4.4 The Customer has such knowledge and expertise in financial and business
matters and is capable of evaluating the merits and risks involved in an
investment in the Shares;
4
<PAGE>
4.5 The Customer is acquiring the Shares not with a view towards the resale or
"distribution" (as that term is used in the Securities Act) thereof;
4.6 The Customer will not sell or otherwise transfer the Shares, or any interest
therein, unless and until (i) said Shares shall have first been registered under
the Securities Act and all applicable state securities laws, or (ii) an
exemption from such registration provisions are available with respect to said
sale or transfer and the Company receives a written opinion of counsel (which
counsel and opinion (in form and substance) shall be reasonably satisfactory to
the Company), confirming that the sale or transfer is exempt from the
registration provisions of the Securities Act and all applicable state
securities laws; and
4.7 The Customer acknowledges that it shall be solely responsible for the
payment of any agency fee, if any, charged by Whale, its agent, in connection
with the receipt of the Shares.
5. Restrictions on Transfer and Registration Rights.
5.1 Restrictions on Transferability. The Shares shall not be transferable in the
absence of registration under the Securities Act and any applicable state
securities laws or exemptions therefrom or in the absence of compliance with any
term of this Agreement. The Company shall be entitled to give stop transfer
instructions to the transfer agent with respect to the Shares in order to
enforce the foregoing restrictions.
5.2 Restrictive Legends. Each certificate representing the Shares shall bear
substantially the following legends (in addition to any legends required under
applicable state securities laws)
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SHARES MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM.
5.3 Piggyback Registration. The Company hereby agrees to register the Shares for
re-sale under the Securities Act, at the Company's expense (except for expenses
of any counsel to the Customer), in a pre-effective amendment to the Company's
Registration Statement on Form SB-2 which was filed with the SEC on June 12,
1998, and to use its best efforts to cause such Registration Statement to become
effective and to remain effective until the Shares may be sold under Rule 144
promulgated under the Securities Act.
6. Miscellaneous.
6.1 Governing Law. This Agreement shall be deemed a contract made under the laws
of, and to be performed in, the State of Nevada and shall be construed and
enforced in accordance with and governed by the laws of the State of Nevada.
5
<PAGE>
6.2 Successors and Assigns. The provisions hereof shall inure to the benefit of,
and be binding upon, the successors, assigns, heirs, executors and
administrators of the parties hereto (specifically including successors in
interest to the Shares).
6.3 Entire Agreement; Amendments. This Agreement sets forth all of the promises,
covenants, agreements, conditions and undertakings between the parties hereto
with respect to the subject matter hereof, and supersedes all prior and
contemporaneous agreements and understandings, inducements or conditions,
express or implied, oral or written, except as contained herein. This Agreement
may not be changed orally but only by an agreement in writing, duly executed by
or on behalf of the party or parties against whom enforcement of any waiver,
change, modification, consent or discharge is sought.
6.4 Notices, etc. All notices and other communications required or permitted
hereunder shall be effective upon receipt and shall be in writing and may be
delivered in person, by facsimile, overnight delivery service or U.S. mail, in
which event it may be mailed by first-class, certified or registered, postage
prepaid, addressed (i) if to Whale or the Customers, at the address set forth in
the first paragraph of this Agreement, or at such other address as Whale shall
have furnished to the Company in writing, or (ii) if to the Company, at its
address set forth in the first paragraph of this Agreement, or at such other
address as the Company shall have furnished to Whale in writing.
6.5 Release. For and in consideration of the Company's sale of the Shares to
Whale, as agent for the Customers, as contemplated herein, and for other good
and valuable consideration, Whale and the Customers hereby remise, release and
forever discharge the Company and any and all of its parents, affiliates,
officers, directors, servants, agents, employees, successors, attorneys and
assigns (collectively, the "Releasees"), from any and all actions and causes of
action, suits, debts, covenants, contracts, agreements, judgments, claims and
demands whatsoever, in law or equity, known and unknown, suspected and
unsuspected (especially including, but not limited to, all claims for tort,
breach of contract and liabilities), arising from or in any way connected with
that certain Common Stock Purchase Agreement dated June 17, 1998 between John W.
Stuart and Whale, pursuant to which Whale acted as agent for the Customers,
which against the Releasees, Whale and the Customers ever had, now have, or
which Whale and the Customers' heirs, executors, representatives,
administrators, successors and assigns, or any of them, thereafter can, shall or
may have, for or by reason of any cause, matter or thing whatsoever, from the
beginning of the world to the present.
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<PAGE>
6.6 Severability of this Agreement. If any provision of this Agreement shall be
judicially determined to be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
6.7 Titles and Subtitles. The titles of the paragraphs and subparagraphs of this
Agreement are for convenience of reference only and are not to be considered in
construing this Agreement.
6.8 Counterparts. This Agreement may be executed in any number of counterparts,
each of which shall be an original, but all of which together shall constitute
one instrument.
7
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
and delivered by their proper and duly authorized officers as of the day and
year first written above.
ON STAGE ENTERTAINMENT, INC.
By: /s/ David Hope
-----------------------------
David Hope
President
WHALE SECURITIES CO., L.P.
By: /s/ William G. Walters
------------------------------
William G. Walters
Chairman
8
<PAGE>
EXHIBIT A
Schedule of Shares to go to Customers
<PAGE>
EXHIBIT B
Articles of Incorporation
(See Attached)
<PAGE>
EXHIBIT C
Bylaws
(See Attached)
<PAGE>
SCHEDULE 2.4
Subsidiaries
The Company has the following subsidiaries:
On Stage Productions, Inc.
On Stage Events, Inc.
On Stage Theaters, Inc.
On Stage Theatres Canada, Inc.
On Stage Casino Entertainment, Inc.
On Stage Merchandise, Inc.
Legends in Concert, Inc.
Interactive Events, Inc.
On Stage Marketing, Inc.
Fort Liberty, Inc.
King Henry's, Inc.
On Stage North Myrtle Beach, Inc.
On Stage South Surfside Beach, Inc.
Wild Bill's California, Inc.
Blazing Pianos, Inc.
COMMON STOCK PURCHASE AGREEMENT
by and between
ON STAGE ENTERTAINMENT, INC.
(a Nevada corporation)
and
RICHARD S. KANFER
(an individual)
<PAGE>
COMMON STOCK PURCHASE AGREEMENT
THIS COMMON STOCK PURCHASE AGREEMENT is made as of February ___, 1999, by and
among ON STAGE ENTERTAINMENT, INC., a Nevada corporation ("On Stage") and
RICHARD S. KANFER, an individual ("Kanfer").
RECITALS:
WHEREAS, on or about November 1, 1996, On Stage and Kanfer entered into
a Common Stock Purchase Agreement for the acquisition of Kanfer's limited
engagement business in Georgia entitled Interactive Events, Inc., a Georgia
corporation ("Interactive Events Acquisition"); and
WHEREAS, pursuant to the express terms of the Interactive Events
Acquisition, Kanfer transferred his ownership in Interactive Events, Inc., a
Georgia corporation to On Stage in exchange for, among other items: (1) 30,304
shares of On Stage common stock; (2) an option to purchase 15,000 shares of On
Stage common stock at a strike price of $5.00 per share; and (3) an employment
agreement through December 31, 1998; and
WHEREAS, Kanfer's Employment Agreement has subsequently expired and the
parties hereto are desirous of entering into this Agreement to unwind the
Interactive Events Acquisition, save for the Covenant Not to Compete and the
Assignment of Shows paragraphs contained therein, and to continue Kanfer and On
Stage's working relationship.
Witnesseth
NOW, THEREFORE, in consideration of the respective covenants contained
herein and intending to be legally bound hereby, the parties hereto agree as
follows:
ARTICLE 1
DEFINITIONS
For convenience, certain terms used in more than one part of this
Agreement are listed in alphabetical order and defined or referred to below
(such terms as well as any other terms defined elsewhere in this Agreement shall
be equally applicable to both the singular and plural forms of the terms
defined).
"Agreement" means this Agreement and the schedules hereto.
1
<PAGE>
"Charter Documents" means an entity's certificate or articles of
incorporation, certificate defining the rights and preferences of securities,
articles of organization, general or limited partnership agreement, certificate
of limited partnership, joint venture agreement or similar document governing
the entity.
"Closing" means the Closing on the Transactions.
"Closing Date" is defined in Section 2.3.
"Code" means the Internal Revenue Code of 1986, as amended, and the
Regulations promulgated thereunder.
"Encumbrances" means any lien, mortgage, security interest, pledge,
restriction on transferability, defect of title or other claim, charge or
encumbrance of any nature whatsoever on any property or property interest.
"GAAP" means United States generally accepted accounting principles.
"GGCL" means the Georgia General Corporations Law.
"Interactive" means Interactive Events, Inc., a Georgia corporation.
"Interactive Shares" means all of the outstanding shares of
Interactive Common Stock.
"IRS" means the Internal Revenue Service.
"Kanfer Options" means Kanfer's option to acquire 15,000 On Stage
Shares dated November 1, 1996 along with Kanfer's option to purchase
19,835 On Stage Shares dated September 1, 1996.
"Kanfer Shares" means the 30,304 shares of On Stage Common Stock owned
by Kanfer.
"On Stage Common Stock" means the Common Stock, no par value per share,
of On Stage.
"On Stage Shares" means the shares of On Stage Common Stock to be
provided in connection with the Transactions.
"Person" means any natural person, corporation, partnership,
proprietorship, association, trust or other legal entity.
"Real Property Lease" is defined in Section 3.5.
"Securities Act" means the Securities Act of 1933, as amended, and the
Regulations promulgated thereunder.
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<PAGE>
"Transaction Documents" means this Agreement and the other agreements
and documents contemplated hereby and thereby.
"Transactions" means the transactions contemplated by the Transaction
Documents.
ARTICLE II
SALE AND PURCHASE OF INTERACTIVE SHARES
2.1 Sale and Purchase of Interactive Shares. Subject to the terms and conditions
of this Agreement, at the Closing, On Stage shall sell, transfer, convey, assign
and deliver to Kanfer, and Kanfer shall purchase, acquire and accept from On
Stage, all the Interactive Shares free and clear of all liens, claims, charges,
restrictions, equities and encumbrances of any kind. It is understood that for
purposes of this Agreement, Kanfer is re-purchasing/re-acquiring his former
business which he sold to On Stage including all assets, phone numbers, real and
personal property, customer lists, cast lists, goodwill and anything else that
is necessary for the continued operation of the Interactive Events business.
2.2 Issuance and Transfer of Shares. In consideration for the Interactive Shares
Kanfer shall return to On Stage the: (a) Kanfer Shares; and (b) Kanfer Options.
2.3 Closing. The Closing shall take place on or before February 1, 1999. The
date on which the Closing occurs is referred to herein as the "Closing Date."
2.4 Delivery to Kanfer . At the Closing, On Stage shall deliver to Kanfer: (i)
certificates representing the Interactive Shares; and (ii) all such other
endorsements, assignments and other instruments as are necessary to vest in
Kanfer title to the Interactive Shares free and clear of any adverse claims.
2.5 Delivery to On Stage. At the Closing, Kanfer shall deliver to On Stage the
number of Kanfer Shares and Kanfer Options referred to in Section 2.
2.6 Further Assurances. After the Closing, Kanfer and On Stage shall each from
time to time, at the request of a party hereto and without further cost or
expense to the requesting party, execute and deliver such other instruments of
conveyance and transfer and take such other actions as the requesting party may
reasonably request, in order to more effectively consummate the Transactions and
to vest in On Stage or Kanfer, as the case may be, title to the Kanfer Shares or
Interactive Shares, as the case may be, being transferred hereunder.
3
<PAGE>
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF ON STAGE
On Stage each hereby represents and warrants to Kanfer as follows:
3.1 Corporate Status. Interactive is a corporation duly organized, validly
existing and in good standing under the laws under which it was incorporated.
3.2 Authorization. On Stage has the requisite power and authority to execute and
deliver the Transaction Documents to which it is or will be a party and to
perform the Transactions to be performed by it. Such execution, delivery and
performance by On Stage has been duly authorized by all necessary corporate
action. The Transaction Documents executed on or before the date hereof
constitute, and the Transaction Documents to be executed after the date hereof
will constitute, valid and binding obligations of On Stage, enforceable in
accordance with their terms.
3.3 Capitalization and Stock Ownership. The total authorized capital stock of
Interactive consists of 1,000,000 shares of Interactive Common Stock, 1,000
shares of which are issued and outstanding on the date hereof and no shares of
which are issued and held by Interactive as treasury stock. There are no issued
shares of Preferred Stock. There are no existing options, warrants, calls,
commitments or other rights of any character (including conversion or preemptive
rights) relating to the acquisition of any issued or unissued capital stock or
other securities of Interactive. All of the Interactive Shares are duly and
validly authorized and issued, fully paid and non-assessable. On Stage is the
sole record owner of all of the Interactive Shares. Interactive complied with
all applicable Regulations in connection with the issuance of all of the
Interactive Shares.
3.4 Title to Interactive Assets and Related Matters. To the best knowledge of On
Stage, Interactive has good and marketable title to, or valid leasehold
interests in, all of the Interactive Assets, a true and correct list of which is
attached hereto as Schedule 3.4. The use of the Interactive Assets is not
subject to any Encumbrances (other than those specified in the preceding
sentence), and such use does not materially encroach on the property or rights
of anyone else.
3.5 Real Property. Schedule 3.5 describes all real estate used in the operation
of the Interactive Business as well as any other real estate that is in the
possession of or leased by On Stage on behalf of Interactive and the
improvements (including buildings and other structures) located on such real
estate (collectively, the "Real Property"), and lists any leases under which any
such Real Property is possessed (the "Real Estate Leases"). Neither On Stage nor
Interactive are currently in Default under any of the Real Estate Leases, nor
are they aware of any Default by any of the lessors thereunder.
4
<PAGE>
3.6 Certain Personal Property. Schedule 3.6 is an asset schedule, describing and
specifying the location of all items of tangible personal property that are to
be transferred to Kanfer pursuant to this Agreement. All personal property
listed on Schedule 3.6 are being transferred "As Is" with no warranties either
express or implied.
3.7 Subsidiaries. Interactive does not own, directly or indirectly, any interest
or investment (whether equity or debt) in any corporation, partnership,
business, trust, joint venture or other legal entity.
3.8 Corporate Records. The minute books of Interactive contain complete, correct
and current copies of its Charter Documents and bylaws and of all minutes of
meetings, resolutions and other proceedings of its Board of Directors or
committees thereof and stockholders. The stock record book of Interactive is
complete and correct.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF KANFER
Kanfer hereby represents and warrants to On Stage as follows:
4.1 Consents and Approvals. Neither the execution and delivery by Kanfer of the
Transaction Documents to which it is or will be a party, nor the performance of
the Transactions to be performed by Kanfer, will require any filing, consent or
approval.
4.2 Purchase Entirely for Own Account. This Agreement is made in reliance upon
Kanfer's representation to On Stage, which by Kanfer's execution of this
Agreement Kanfer hereby confirms, that the Interactive Shares will be acquired
for investment for Kanfer's own account, not as a nominee or agent, and not with
a view to transfer. Kanfer represents that it has full power and authority to
enter into this Agreement.
4.3 Restricted Securities. Kanfer understands that the Interactive Shares are
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from On Stage in a transaction not involving
a public offering and that under such laws and applicable regulations such
shares may be resold without registration under the Act, only in certain limited
circumstances. It is understood that the Interactive Shares shall bear a legend
to such effect.
5
<PAGE>
ARTICLE 5
COVENANTS OF KANFER
5.1 Expenses. Kanfer shall pay all of the legal, accounting and other expenses
incurred by Kanfer in connection with the Transactions.
ARTICLE 6
CONDITIONS PRECEDENT TO THE TRANSACTIONSARTICLE
VIII.CONDITIONS PRECEDENT TO THE TRANSACTIONS
6.1 Conditions to Obligations of On Stage. The obligations of On Stage to
consummate the Transactions shall be subject to the satisfaction or waiver, on
or before the Closing, of each of the following conditions:
(a) Assumption of Atlanta Obligations. Kanfer, through his
company Real Source Publications, will assume the lease agreement for the office
located at West One Business Park, 1165 AllGood Park, Suite 15, Marietta,
Georgia 30062-2238, all of the equipment leases and change all utilities into
his name within ten (10) days from the date of this Agreement. Kanfer will use
his good faith best efforts to have On Stage removed from all equipment and
office leases. Until Kanfer is successful in removing On Stage from said leases,
Kanfer will personally indemnify, save and otherwise hold On Stage harmless from
any default under the office and equipment lease agreements. Once On Stage is
removed from all responsibility under the office and equipment lease agreements,
Kanfer will be released from personal liability therefrom.
(b) Consents and Approvals. Kanfer shall have obtained all governmental and
third party consents and approvals necessary, proper or advisable to consummate
the Transactions.
(c) Outstanding Accounts Recievable/Accounts Payable. Kanfer has indicated on
Schedule 6.1(c) which accounts receivable he thinks are recoverable and will
utilize his good faith best efforts to assist On Stage with collection of these
outstanding accounts and the payment of the same to On Stage. Kanfer has also
indicated on Schedule 6.1(c) which accounts payable are due (for their Atlanta
office) as of the date of this Agreement and On Stage agrees that they will be
solely responsible for the payment of these accounts. On Stage further agrees
that they will be responsible for payment of any and all accounts receivable
incurred by them during their ownership of Interactive Events up to the date of
this Agreement.
6
<PAGE>
(d) Release of Liability. Simultaneous with the execution of this Agreement, On
Stage and Kanfer shall each execute a Release of Liability in the forms attached
hereto on Schedule 6.1(d).
(e) Return of Options. Kanfer shall deliver to On Stage the Kanfer Options,
which will be considered null and void, ab initio, upon the execution of this
Agreement.
6.2 Conditions to Obligations of Kanfer. The obligations of Kanfer to consummate
the Transactions shall be subject to the satisfaction or waiver, on or before
the Closing, of each of the following conditions:
(a) Assignment of Office and Equipment Leases and Title to Personal Property. On
Stage shall assign to Kanfer all of its rights in the office and equipment
leases for the Atlanta property, along with the title to the personal property
listed on Schedule 3.4 attached hereto.
(b) Right to Represent Legends in Concert. On Stage shall have executed the
Right to Represent Legends in Concert in the form as is attached hereto on
Schedule 6.2. It is expressly understood that Kanfer is
re-purchasing/re-acquiring his list of Interactive Clients and Actors listed on
Schedule 4.23 of the Interactive Events Acquisition Agreement. Kanfer warrants
that neither he nor anyone working for him in the Atlanta office since November
1, 1996 has ever sold, produced or otherwise made to happen a Legends in Concert
show or derivative thereof for any of the clients on Schedule 4.23, a true and
correct copy of said list is attached to the Right to Represent Legends
agreement contained on Schedule 6.2.
ARTICLE 7
CONTENTS OF AGREEMENT, AMENDMENT,
PARTIES IN INTEREST, ASSIGNMENT, ETC.
This Agreement sets forth the entire understanding of the parties hereto with
respect to the subject matter hereof. This Agreement may be amended, modified or
supplemented only by a written instrument duly executed by each of the parties
hereto. This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective heirs, legal representatives, successors and
permitted assigns of the parties hereto. No party hereto shall assign this
Agreement or any right, benefit or obligation hereunder. Any term or provision
7
<PAGE>
of this Agreement may be waived at any time by the party entitled to the benefit
thereof by a written instrument duly executed by such party. The parties hereto
shall execute and deliver any and all documents and take any and all other
actions that may be deemed reasonably necessary by their respective counsel to
complete the Transactions.
ARTICLE 8
INTERPRETATION
Unless the context of this Agreement clearly requires otherwise, (a) references
to the plural include the singular, the singular the plural, the part the whole,
(b) "or" has the inclusive meaning frequently identified with the phrase
"and/or" and (c) "including" has the inclusive meaning frequently identified
with the phrase "but not limited to." The section and other headings contained
in this Agreement are for reference purposes only and shall not control or
affect the construction of this Agreement or the interpretation thereof in any
respect. Section, subsection, schedule and exhibit references are to this
Agreement unless otherwise specified. Each accounting term used herein that is
not specifically defined herein shall have the meaning given to it under GAAP.
ARTICLE 9
NOTICES
All notices that are required or permitted hereunder shall be in writing and
shall be sufficient if personally delivered or sent by mail, facsimile message
or Federal Express or other delivery service. Any notices shall be deemed given
upon the earlier of the date when received at, or the third day after the date
when sent by registered or certified mail or the day after the date when sent by
Federal Express to, the address or fax number set forth below, unless such
address or fax number is changed by notice to the other party hereto:
If to On Stage:
c/o Legends In Concert, Inc.
4625 W. Nevso Drive, Suite 10
Las Vegas, Nevada 89103
Attention: Christopher Grobl, General Counsel
If to Kanfer:
Richard S. Kanfer
======================
8
<PAGE>
ARTICLE 10
GOVERNING LAW
This Agreement shall be construed and interpreted in accordance with the laws of
the state of Nevada, without regard to its provisions concerning conflict of
laws.
ARTICLE 11
COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which shall
be binding as of the date first written above, and all of which shall constitute
one and the same instrument. Each such copy shall be deemed an original, and it
shall not be necessary in making proof of this Agreement to produce or account
for more than one such counterpart.
ARTICLE 12
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
All representations and warranties made by any party in this Agreement or
pursuant hereto shall survive the Closing hereunder and any investigation at any
time made by or on behalf of the other party and for a period of one year
following the Closing.
ARTICLE 13
REMEDIES CUMULATIVE
The remedies provided herein shall be cumulative and shall not preclude a party
from asserting any other rights or seeking any other remedies against the other
party or its successors or assigns.
ARTICLE 14 SEVERABILITY
The invalidity of any one or more of the words, phrases, sentences, clauses or
sections contained in this Agreement shall not affect the enforceability of the
remaining portions of this Agreement or any part thereof, all of which are
inserted conditionally on their being valid in law, and, in the event that any
one or more of the words, phrases, sentences, clause or sections contained in
this Agreement shall be declared invalid, this Agreement shall be construed as
if such invalid word or words, phrase or phrases, sentence or sentences, clause
or clauses, or section or sections had not been inserted. If such invalidity is
caused by length of time or size of area, or both, the otherwise invalid
provision will be considered to be reduced to a period or area which would cure
such invalidity.
9
<PAGE>
ARTICLE 15
BULK TRANSFER
The parties hereto waive compliance with the requirements of the bulk sales law
of any jurisdiction in connection with the sale of the Interactive Shares.
Kanfer shall indemnify and hold On Stage harmless against all liabilities which
may be asserted by third parties with respect to assets sold by On Stage as a
result of noncompliance with any such bulk sales laws.
ARTICLE 16
ARBITRATION
The parties agree that all disputes, claims, and controversies between or among
them arising from or relating to this Agreement shall be arbitrated in Clark
County, Nevada, pursuant to the Rules of the American Arbitration Association,
upon the request of any party.
ARTICLE 17
TAX FREE EXCHANGE
It is understood that the parties intend that this transaction represents a tax
free exchange under the Internal Revenue Code. However, this Agreement is not
contingent upon a ruling from the Internal Revenue Service (the "IRS") that the
transactions contemplated herein constitute a tax free exchange and the parties'
agreements herein are effective and binding on them irrespective of any
favorable or negative ruling from the IRS.
10
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of
the day and year first written above.
ON STAGE ENTERTAINMENT, INC.
a Nevada corporation
By:___________________________________
Name:
Title:
RICHARD S. KANFER,
an individual
--------------------------------------
11
<PAGE>
SCHEDULE 3.4
Interactive Events Assets
<PAGE>
SCHEDULE 3.5
Real Property
NOT APPLICABLE
<PAGE>
SCHEDULE 3.6
Personal Property
SEE SCHEDULE 3.4--INTERACTIVE EVENTS ASSETS
<PAGE>
SCHEDULE 6.1(c)
Outstanding Accounts Receivable/Accounts Payable
<PAGE>
SCHEDULE 6.1(d)
Release of Liability
<PAGE>
SCHEDULE 6.2
Form of Rights of Representation Agreement
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The financial statements included herein include the accounts of On Stage
Entertainment, Inc., a publicly traded Nevada corporation (the "Company" or
"OSE") and its subsidiaries, Legends in Concert, Inc., a Nevada corporation
("LIC"); On Stage Marketing, Inc., a Nevada corporation ("Marketing"); On Stage
Theaters, Inc., a Nevada corporation ("Theaters"); Wild Bill's California, Inc.,
a Nevada corporation ("Wild Bills"); Fort Liberty, Inc., a Nevada corporation
("Ft. Liberty"); Blazing Pianos, Inc., a Nevada corporation ("Blazing"); King
Henry's Inc., a Nevada corporation ("King Henry's"); On Stage Merchandise, Inc.,
a Nevada corporation ("Merchandise'); On Stage Events, Inc., a Nevada
corporation ("Events"); On Stage Casino Entertainment, Inc., a Nevada
corporation ("Casino"); On Stage Productions, Inc., a Nevada corporation
("Productions"); On Stage Theaters North Myrtle Beach, Inc., a Nevada
corporation ("North Myrtle"); On Stage Theaters Surfside Beach, Inc., a Nevada
corporation ("Surfside"); and Interactive Events, Inc., a Georgia corporation
(collectively, the "Subsidiaries").
The Company derives its net revenues from six reportable segments. The Casinos
segment ("Casinos") primarily sells live theatrical productions to casinos
worldwide for a fixed fee. In addition this division also operates the Company's
Legends show at the Imperial Palace. The Theaters segment ("Theaters") owns or
rents live theaters and dinner theaters in urban and resort tourist locations
primarily in the United States. This segment derives its revenues from the sale
of tickets and food and beverage to patrons who attend live theatrical
performances at these venues. The Events segment ("Events") sells live
theatrical productions to commercial clients, which include corporations, theme
and amusement parks and cruise lines for a fixed fee. The Merchandise segment
("Merchandise") sells merchandise and souvenir photography products to patrons
who attend the Company's productions. The Production Services segment sells
technical equipment and services to commercial clients, however, this division's
primary focus is to technically support all of the other divisions. The On Stage
Entertainment segment is responsible for the corporate management of all the
Company's segments.
The accounting policies of the reportable operating segments are the same as
those described in the Summary of Accounting Policies. The Company's management
evaluates the performance of its operating segments based upon the profit and
loss from operations.
The Company's reportable segments are strategic business units because each unit
services a different market or performs a specialized function in support of a
given market.
1
<PAGE>
Results of Operations
The following table sets forth the various components of the Company's net
revenue as a percentage of the total net revenue for the periods indicated:
Years Ended December 31,
1997 1998
-------- --------
Net revenue..................................... 100.0% 100.0%
Costs of Revenues............................... 72.5 79.8
-------- --------
Gross profit.................................... 27.5 20.2
Selling, general and administrative............. 31.5 22.5
Depreciation and amortization................... 6.2 6.5
Expenses at discontinued location............... 3.1 1.6
Asset impairment loss........................... 0.0 1.5
-------- ---------
Operating loss.................................. (13.3) (11.9)
Interest expense, net........................... 5.3 5.6
-------- ---------
Pre-tax loss.................................... (18.6) (17.5)
Income taxes.................................... 0.1 0.0
Net loss........................................ (18.7)% (17.5)%
======== =========
Net loss for the year ended December 31, 1997, was $2,946,056, as compared to a
net loss of $4,870,989 for the year ended December 31, 1998.
The following tables sets forth, the results of operations by the Company for
reportable segment indicated:
Year ended December 31, 1997
Casinos Events Merchandise Theaters
- - --------------------------- ----------- ----------- ------------ -------------
Net revenues............... $6,326,952 $2,552,440 $ 454,842 $ 6,391,840
Cost of revenues........... 3,841,285 1,709,708 103,330 5,627,492
----------- ----------- ------------ -------------
Gross profit............... 2,485,667 842,732 351,512 764,348
Selling, general
& administrative.......... 296,104 639,961 36,359 233,548
Depreciation &
amortization............. 141,275 6,221 - 323,336
Discontinued location...... - - - 489,285
----------- ----------- ------------ ------------
Operating income (loss)..... 2,048,288 196,550 315,153 (281,821)
Interest expense, net....... - (297) - -
----------- ----------- ------------ ------------
Net income (loss) before
income taxes............... 2,048,288 196,847 315,153 (281,821)
Income taxes................ - 3,197 - -
----------- ----------- ------------ ------------
Net income (loss)...........$2,048,288 $ 193,650 $ 315,153 $ (281,821)
=========== =========== ============ ============
2
<PAGE>
Year ended December 31, 1997
(continued)
Sub-Total
Operating Total
Corporations Production OSE Consolidated
- - --------------------------- ----------- ---------- ------------ -------------
Net revenues............... $15,726,074 $ - $ - $15,726,074
Cost of revenues........... 11,281,815 131,709 - 11,413,524
----------- ---------- ------------ -------------
Gross profit............... 4,444,259 (131,709) - 4,312,550
Selling, general
& administrative.......... 1,205,972 62,985 3,677,178 4,946,135
Depreciation &
amortization............. 470,832 - 511,348 982,180
Discontinued location...... 489,285 - - -
----------- ---------- ------------- -------------
Operating income (loss)..... 2,278,170 (194,694) (4,188,526) (2,105,050)
Interest expense, net....... (297) - 834,630 834,333
----------- ---------- ------------- -------------
Net income (loss) before
income taxes............... 2,278,467 (194,694) (5,023,156) (2,939,383)
Income taxes................ 3,197 - 3,476 6,673
----------- ---------- ------------- -------------
Net income (loss)...........$2,275,270 $(194,694) $(5,026,632) $(2,946,056)
=========== =========== ============= =============
Year ended December 31, 1998
Casinos Events Merchandise Theaters
- - --------------------------- ---------- ------------ ------------- ------------
Net revenues............... $6,977,020 $ 2,554,942 $ 1,243,451 $ 17,064,071
Cost of revenues.......... 4,522,257 1,900,216 812,505 14,727,694
----------- ------------ ------------- ------------
Gross profit............... 2,454,763 654,726 430,946 2,336,377
Selling, general &
administrative............. 417,686 736,365 173,137 1,506,432
Depreciation & amortization 268,780 140,455 5,055 1,529,918
Asset impairment loss...... - - - 409,117
----------- ------------ ------------- ------------
Operating income (loss).... 1,768,296 (222,094) 252,754 (1,109,090)
Interest expense, net...... 4,712 1,292 193 1,354,370
----------- ------------ ------------- ------------
Net income (loss) before
Income taxes........... 1,763,585 (223,336) 252,561 (2,463,460)
Income taxes............... 0 0 0 0
=========== ============ ============= ============
Net income (loss).......... $1,763,585 $ (223,386) $ 252,561 $ (2,463,460)
=========== ============ ============= ============
3
<PAGE>
Year ended December 31, 1998
(continued)
Sub-Total
Operating Total
Corporations Production OSE Consolidated
- - --------------------------- ------------ ---------- ---------- ------------
Net revenues............... $27,839,484 $ 7,992 $ - $ 27,847,476
Cost of revenues.......... 21,962,672 265,852 - 2,228,524
----------- ---------- ---------- ------------
Gross profit............... 5,876,812 (257,860) - 5,618,952
Selling, general &
administrative............. 2,833,620 255,640 3,187,064 6,276,325
Depreciation & amortization 1,944,208 44,704 260,710 2,249,622
Asset impairment loss...... 409,117 - - 409,117
----------- ---------- ---------- ------------
Operating income (loss).... 689,866 (558,204) (3,447,774) (3,316,112)
Interest expense, net...... 1,360,567 - 194,310 1,554,877
----------- ---------- ----------- ------------
Net income (loss) before
Income taxes........... (670,701) (558,204) (3,642,085) (4,870,989)
Income taxes............... 0 0 0 0
=========== ========== =========== ============
Net income (loss).......... $ (670,700) $ (558,204) $(3,642,085) $(4,870,989
=========== ========== =========== ============
Year Ended December 31, 1997 versus Year Ended December 31, 1998
Net Revenues
Revenues were $27,847,000 for the year ended December 31, 1998 compared to
$15,726,000 for the year ended December 31, 1997, an increase of $12,121,000, or
77.1%. The Company's revenue is derived from four principal segments: Casinos,
Events, Merchandise, and Theaters.
Casinos revenues were approximately $6,977,000 for the year ended December 31,
1998 compared to $6,326,000 for the year ended December 31, 1997, an increase of
$651,000, or 10.2%. The increase was primarily attributable to new show openings
at Hilton Hotel & Casino and Trump Taj Mahal Hotel & Casino in Atlantic City,
New Jersey, as well as new shows at Crown Casino in Melbourne, Australia, River
Palms Resort Casino in Laughlin, Nevada and Muckleshoot Casino in Auburn,
Washington. The increase was partially offset by decrease attributable to the
Legends show at the Imperial Palace in Las Vegas, Nevada.
4
<PAGE>
Events revenues were $2,555,000 for the year ended December 31, 1998 compared to
$2,552,000 for the year ended December 31, 1997, an increase of $3,000, or
0.12%.
Merchandise revenues were approximately $1,243,000 for the year ended December
31, 1998 compared to $455,000 for the year ended December 31, 1997, an increase
of $788,000, or 173.2%. This increase was mainly attributable to an increase in
photo sales as a result of the Kodak Relationship and the inclusion of Gedco
Acquisition properties.
Theaters revenues were approximately $17,064,000 for the year ended December 31,
1998 compared to $6,392,000 for the year ended December 31, 1997, an increase of
$10,672,000, or 166.9%. This increase in revenues was primarily attributed to
new Legends show openings since March 1998 at the Legends Theater in Branson,
Missouri, the Legends show at the Sheraton Centre in Toronto, Canada and the
inclusion of Gedco Acquisition properties. This increase was partially offset by
decreases attributable to the discontinuation of the Legends show in Daytona
Beach, Florida and decrease in revenues derived from the Legends Theater in
Myrtle Beach, South Carolina.
Costs of Revenues
Total costs of revenues were $22,228,524 for the year ended December 31, 1998
compared to $11,414,000 for the year ended December 31, 1997, an increase of
$10,814,524, or 94.8%. Costs of revenues increased to 79.8% of net revenues for
the year ended December 31, 1998, as compared to 72.6% for the year ended
December 31, 1997. This increase in cost of revenues as a percent of net
revenues was primarily attributable to a change in the mix of the Company's
revenues from primarily theater shows to a combination of theater and dinner
theater shows.
Selling, General and Administrative
Selling, general and administrative costs were approximately $6,276,000 for the
year ended December 31, 1998 compared to $4,946,000 for the year ended December
31, 1997, an increase of $1,330,000, or 26.8%. Selling, general and
administrative costs decreased to 22.5% of net revenues for the year ended
December 31, 1998, as compared to 31.5% for the year ended December 31, 1997,
which was primarily attributable to a consolidation of operations resulting in a
reduction of work force due to elimination of duplicate or overlapping positions
5
<PAGE>
Depreciation and Amortization
Depreciation and amortization was $1,807,000 for year ended December 31, 1998
compared to $982,000 for the year ended December 31, 1997, an increase of
$825,000, or 84.0%. The increase was primarily due to capital additions to
current shows, expenses related to a discontinued location and the determination
at December 31, 1998 of the impairment of net assets acquired in connection with
the Interactive purchase. The Company decided to discontinue operations at its
Legends production in Daytona Beach, Florida on December 31, 1997. As part of
the closing, the Company incurred additional expenses of $489,285 during 1997.
Additionally, in 1998 the Company wrote-off $443,096 of Net Assets. The Company
has plans to transfer the remaining furniture and equipment currently located at
the Daytona Beach facility to other locations during 1999.
Asset Impairment Loss
The Company decided to restructure its Legends production in Toronto, Canada on
December 31, 1998. As part of the restructuring, the Company had an impairment
of net assets and wrote off $409,000.
Operating Income
The Company's operating loss was approximately $3,316,000 for the year ended
December 31, 1998 compared to an operating loss of $2,105,000 for the year ended
December 31, 1997, an increase in loss of$1,211,000.
Interest Expense, Net
Interest expense was approximately $1,555,000 for year ended December 31, 1998
compared to $834,000 for the year ended December 31, 1997, an increase of
$721,000 or 86.4%. The increase was primarily due to additional debt incurred
for the Gedco and Fox Family Acquisitions.
Seasonality and Quarterly Results
The Company' s business has been, and is expected to remain, highly seasonal,
with the majority of its revenue being generated during the months of April
through October. Part of the Company's business strategy is to increase sales in
tourist markets that experience their peak seasons from November through March
so as to offset seasonality in revenues. The Gedco Acquisition has helped to
mitigate the Company's seasonality.
6
<PAGE>
The following table sets forth the Company's net revenue for each of the last
eight quarters ended December 31, 1998:
Net Revenues
($ in thousands)
March 30, June 30, September 30, December 31,
---------- ----------- ------------ ------------
Fiscal 1997........ $ 2,719 $ 3,979 $ 5,071 $ 3,957
Fiscal 1998........ $ 3,724 $ 8,245 $ 8,059 $ 7,819
Tax Net Operating Losses
At December 31, 1997 and 1998, the Company had federal net operating loss
carryforwards of approximately $3,138,544 in 1997, and $6,315,193 in 1998,
respectively. Under Section 382 of the Internal Revenue Code, certain
significant changes in ownership contemplated by the Company may restrict the
future utilization of these tax loss carryforwards. The net deferred tax assets
have a 100% valuation allowance, as management cannot determine if it is more
likely than not that the deferred tax assets will be realized.
Liquidity and Capital Resources
General
The Company has historically met its working capital requirements through a
combination of cash flow from operations, equity and debt offerings and
traditional bank financing. The Company anticipates, based on its proposed plans
and assumptions relating to its operations that the Company's current cash, cash
equivalent balances, anticipated revenue from operations and its working capital
line are insufficient to fund the Company's ongoing operations.
The Company intends to manage short-term liquidity concerns through the
renegotiations of its expired working capital line, capital leases and mortgage
facilities. The Company has either closed down or restructured any business
units that are not generating positive cash flow. In addition the Company has
lowered selling, general and administrative costs as a percentage of net
revenues from 31.5% in 1997 to 22.4% in 1998 and continues to downsize and
restructure its selling, general and administrative functions.
In addition, the Company is continuing its efforts to secure working capital for
operations, expansion and possible acquisitions, mergers, joint ventures, and/or
other business combinations. However, there can be no assurance that the Company
will be able to secure additional capital or that if such capital is available,
whether the terms or conditions would be acceptable to the Company.
For the year ended December 31, 1997, the Company had net cash deficit used by
operations of approximately $1,099,000. This net cash deficit was primarily
attributable to the losses incurred at the Company's Legends show in Daytona
Beach, Florida, and increases in selling, general and administrative expenses
incurred in anticipation of the rapid growth of the Company. For the year ended
December 31, 1998, the Company had a net cash deficit from operations of
$1,534,000. The net cash deficit provided from operations was primarily
attributable to legal fees, and vacations accruals, assets impairment expenses",
and due diligence expense written off related with prospective acquisitions,
operational losses at the Legends show in Toronto, Canada, Wild Bill's Dinner
Extravaganza in Buena Park, California, and the debt service on the Company's
mortgage and credit line facilities.
7
<PAGE>
The net cash used in investing activities for the year ended December 31, 1996
of $1,241,000, was primarily attributable to capital expenditures and advances
on notes receivable from officers, and direct acquisition costs. The net cash
used in investing activities for the year ended December 31, 1998 of
$14,548,000, was primarily attributable to advances on notes receivable from
officers, capital expenditures and direct acquisition costs related to
acquisitions.
On August 13, 1997, the Company completed an initial public offering of
1,400,000 shares of common stock at $5.00 per share and redeemable warrants to
purchase 1,610,000 shares of its common stock at $0.10 per warrant (the "IPO").
The net proceeds to the Company of the IPO, after underwriting discounts,
commissions and expenses, was approximately $4,856,000, net of offering costs
incurred by the Company of approximately $1,414,000.
Net cash provided by financing activities for the year ended December 31, 1997
of $4,373,000 was primarily generated from the IPO. This increase in cash was
partially offset by the repayment of a $750,000 bridge loan (the "DYDX Loan").
Net cash provided by financing activities for the year ended December 31, 1998
of $14,701,0000 was primarily attributable to ICCMIC's funding of $12,500,000
for the Gedco Acquisition and $1,650,000 million for the Fox Acquisition.
Working Capital at December 31, 1997 the Company had working capital of
approximately $1,797,000, due primarily from proceeds derived from the sale of
the Company's common stock and redeemable warrants from the IPO. The proceeds of
the IPO were partially offset by increases in inventory and deposits. At
December 31, 1998, the Company had a working deficit of approximately
$16,791,000, which resulted, primarily, from increase in: working capital line
of credit, accounts payable, accrued expenses, and accrued payroll and other
liabilities. Due to recurring losses and the working capital deficit and the
loan defaults the Company's auditors have issued a going concern opinion.
On August 13, 1997, the Company converted all of the approximate $1,800,000 of
principal amount under outstanding convertible debentures into an aggregate of
505,649 shares of common stock. The aforementioned conversion was based upon a
ratio of 295 shares of common stock per each $1,000 principal amount of
convertible debenture. The conversion resulted in a one time, non-recurring,
interest expense charge to the Company in the amount of $194,228 (based on an
imputed value of $4.00 per share of common stock).
On August 13, 1997, the Company paid off the DYDX Loan in full, which, with
principal and interest, totaled $773,000.
As of December 31, 1996, the Company had a term loan outstanding in the
principal amount of $150,000, with First Security Bank of Nevada ("First
Security"), which accrued interest at a rate of 11.5% per annum. On October 10,
1997, the Company paid off this term loan, in full, which, including all
outstanding principal and accrued interest, was $19,091.
8
<PAGE>
Working Capital Line
In May 1997, First Security issued a line of credit to the Company for up to
$250,000. Borrowings under such facility bear variable interest at 1.5% over the
First Security Bank of Idaho's index (10% per year as of the facility's
inception) and are due on demand. John W. Stuart has personally guaranteed the
line of credit.
On March 28, 1998, First Security agreed to increase the line of credit from
$250,000 to $1,000,000 and the expiration date was extended to March 25, 1999.
As of December 31, 1998, the Company had drawn $1,000,000 on the line of credit.
As of March 31, 1999, the Company had failed to pay off any part of the line of
credit and, is in default under its terms. The Company is continuing to
negotiate with First Security to either extend the line of credit or convert it
into a term loan facility. As of April 15, 1999 the Company has not received a
notice of default. (See "Liquidity and Capital Resources- General".)
Capital Equipment Financing Commitment
On September 29, 1997, First Security Leasing Company, a Utah corporation,
approved the Company for a $1,000,000 lease line. Advances under the line of
credit incur interest at a rate of 9.75% per annum. The lease line has been
utilized in the following amounts: $389,290, $442,997 and $167,713, commencing
in April, 1998, April 1998 and May, 1998, respectively, and terminating on
October, 2001, September, 2001 and November, 2001. All these leases have a
cross-default provision with the Working Capital Line. Mortgage Financing
Commitment
On March 13, 1998, Imperial Credit Commercial Mortgage Investment Corporation
("ICCMIC") signed an agreement with the Company to fund up to $20,000,000 of
mortgage financing. On the same date, the Company used $12,500,000 of said
facility to fund the cash portion of the Gedco Acquisition and related fees. The
Company subsequently used $1,100,000 on June 30, 1998 to fund the cash portion
of the Fox Acquisition and $550,00 on October 7, 1998 to help the Company with
its working capital needs. In addition concurrent with the ICCMIC financing,
Mark Karlan, the President of ICCMIC, was elected to the Company's Board of
Directors, filling a vacancy created by the resignation of Kenneth Berg. The
Company has made its January, February and March 1999 payments after the due
date for such payments. As a result of such delinquencies, the Company has
incurred late charges and default interest, which the Company has not paid, is
in default under the ICCMIC facility and is unable to make additional borrowings
under such facility. Since the Company is in default, all debt has been
classified as current. As of April 14, 1999, the Company had not made its
payment to ICCMIC due April 1, 1999. Therefore, the debt was classified as
current as of December 31, 1998 and the Company's auditors have issued a going
concern opinion.The Company is currently negotiating with ICCMIC to extend some
of the repayment terms under such facility and to waive or amend certain other
defaults under the facility, including a breach of certain debt service coverage
ratios warranted by the Company.
Impact of Inflation
The Company believes that inflation has not had a material impact on its
operations. However, substantial increases in material costs could adversely
affect the operations of the Company for future periods.
Year 2000
The Company believes that its accounting and financial reporting systems are in
full compliance. The Company has invested in the latest hardware and software
and has implemented standards that require Year 2000 compliance from all
vendors. The Company anticipates no problems in maintaining this compliance in
the future.
9
<PAGE>
However, we are still continuing to assess Year 2000 preparedness, the Company
is actively coordinating with vendors, creditors and financial organizations to
prepare for possible repercussions of non-compliance. The Company is also
undertaking exhaustive surveys in each of our geographic locations to further
determine preparedness. The Company has hired Business Communications, Inc.
("BCI") to visit each site and physically re-certify that each machine,
microprocessor and software program in use is compliant. The Company has
allocated $50,000 to complete its certification program and anticipates
completion by June 30, 1999.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" ("SFAS No. 129") issued by the FASB is effective for
financial statements ending after December 15, 1997. The new standard reinstates
various securities disclosure requirements previously in effect under Account
Principles Board Opinion No. 15, which has been superseded by SFAS No. 129. The
Company adopted SFAS No. 129 as of January 1, 1998 and had no effect on its
financial position or results of operations.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company adopted SFAS No. 130 as of
January 1, 1998 and it had no effect on its financial position or results of
operations.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131") issued by the FASB is
effective for financial statements with fiscal years beginning after December
15, 1997. Earlier application is permitted. SFAS No. 131 requires that the
public companies report certain information about operating segments, products,
services and geographical areas in which they operate and their major customers.
The Company adopted SFAS No. 131 on January 1, 1998 and it had no effect on its
financial position or results of operations; however, disclosures on certain of
these items were expanded.
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities,"
("SOP 98-5") issued by the American Institute of Certified Public Accountants is
effective for financial statements beginning after December 15, 1998. SOP 98-5
requires that the costs of start-up activities, including organization costs, be
expensed as incurred. Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customers (excluding ongoing customer acquisition costs, such as policy
acquisition costs and loan origination costs) or beneficiary, initiating a new
process in an existing facility, or commencing some new operation. The Company
does not expect the adoption of SOP 98-5 to have a material impact, if any, on
its financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" effective for financial statements with
fiscal years beginning after June 15, 1999. SFAS No. 133 provides a
comprehensive and consistent standards for the recognition and measurement of
derivatives and hedging activities and requires all derivatives to be recorded
on the balance sheet at fair value. The Company does not expect the adoption of
SFAS No. 133 to have a material impact, if any, on its results of operations,
financial position or cash flows.
10
<PAGE>
Subsequent Events
Notes Payable to Principal Stockholder
On March 4, 1999, the Board of Directors authorized a loan in the principal
amount of $100,000 from John W. Stuart the Company's Chairman, Chief Executive
Officer and Principal Stockholder (the "Stuart Loan"). The Stuart Loan is
evidenced by a one year promissory note bearing an interest rate of twelve
percent (12%) per annum, due on March 3, 2000. In consideration for the Stuart
Loan, the Board of Directors approved the issuance of warrants to purchase
100,000 shares of the Company's common stock at a price of $1.00 per share, the
market price on the closing date of the Stuart Loan. Additionally, the Company
agreed to pay legal fees incurred by Mr. Stuart in connection with this
transaction.
On April 5, 1999, Mr. Stuart agreed to extend a bridge loan in an aggregate
principal amount not to exceed $500,000 to the Company. As of April 15, 1999,
the Company had reported $200,000 of the funds available at a rate of twelve
percent (12%) interest per annum. Outstanding unpaid principal and interest are
due April 4, 2000. The Company paid an origination fee of five percent (5%) of
the principal amount of the loan.
Notes Receivable from Chief Financial Officer
On April 13, 1998, the Company loaned $63,213 to Kiran Sidhu, the Company's
Senior Vice President and Chief Financial Officer, to assist Mr. Sidhu with
satisfying personal income taxes incurred as a result of the issuance of 40,532
shares of the Company's Common Stock in accordance with the terms of Mr. Sidhu's
employment agreement with the Company (the "Sidhu Note"). The Sidhu Note, which
recently matured on April 12, 1999, is secured by Mr. Sidhu's 40,532 shares of
the Company's Common Stock. Mr. Sidhu has recently requested that the Company
extend the maturity date of the Sidhu Note through to December 31, 1999, due
primarily to the fact that he does not have the money to repay the Sidhu Note,
coupled with the fact that the Common Stock which secures the repayment of the
Sidhu Note is not enough to satisfy the outstanding debt since the Common Stock
has declined in value from $5.00 per share when issued, to approximately $1.00
per share as of the maturity date.
Re-Purchase of Common Stock and Resale Interactive Events, Inc.
On February 23, 1999, the Company entered into a Common Stock Purchase Agreement
(the "Agreement") with Richard S. Kanfer, the Company's former Vice President of
Sales ("Kanfer"), pursuant to which the parties agreed to re-convey the November
1996 acquisition by the Company of Interactive Events, Inc., a Georgia
corporation ("Interactive Events") owned by Kanfer. The Company agreed under the
Agreement all of the assets of Interactive Events, Inc. to Kanfer, in
consideration for the reconveyance by Kanfer of 30,304 shares of the Company's
Common Stock valued at $___ per share, a non-plan option to purchase 15,000
shares of the Company's Common Stock and incentive stock options to purchase
19,835 shares of the Company's Common Stock at a price of $____ per share. In
addition, the parties agreed to release one another from any liability arising
out of the November 1996 acquisition of Interactive Events, Inc. by the Company
and any claim relating to Kanfer's subsequent employment with the Company. The
Company and Kanfer also entered into an exclusive right of representation
agreement in February 1999, pursuant to which the Company granted to Kanfer the
right to represent its' Legends production in designated areas in conversion of
a portion of the gross proceeds generated thereby.
11
<PAGE>
Common Stock Purchase Agreement with Whale Securities Co., LP
On or about January 28, 1999, the Company entered into a Stock Purchase
Agreement with its' underwriter, Whale Securities Co., LP ("Whale"), pursuant to
which the Company agreed to sell 150,000 shares of its' Common Stock to certain
of Whale's customers for an aggregate purchase price of $100,000 on a best
efforts basis.
12
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
-----------------------
Report on Audited Consolidated Financial Statements
For the Years Ended December 31, 1997 and 1998
-----------------------
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page Number
List of Financial Statements.................................. F-2
Report of Independent Certified Public Accountants............ F-3
Consolidated Financial Statements
Balance Sheets........................................... F-4
Statements of Operations................................. F-5
Statements of Stockholders' Equity (Deficit)............. F-5
Statements of Cash Flows................................. F-8
Summary of Accounting Policies........................... F-11
Notes to Financial Statements............................ F-17
<PAGE>
ON STAGE ENTERTAINMENT, INC.
List of Financial Statements
The following financial statements of On Stage Entertainment, Inc. (the
"Company") and the report of the Company's Independent auditors thereon,
included in the 1998 Annual Report to Stockholders, are incorporated by
reference in Item 7:
Report of BDO Seidman, LLP Independent Certified Public Accountants
Balance sheet at December 31, 1998 and 1997
Statements of Operations for the years ended December 31 1998 and 1997
Statements of Stockholders' Equity (Deficit) for the years ended December 31,
1998 and 1997
Statements of cash Flow for the years ended December 31, 1998 and 1997
Notes to Financial Statements
F-2
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders of
On Stage Entertainment, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of On Stage
Entertainment, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for each of the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of On Stage
Entertainment, Inc. and Subsidiaries at December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the years then
ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring operating
losses, and at December 31, 1998, has a working capital deficiency of
$16,791,483 that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ BDO SEIDMAN, LLP
Los Angeles, California
April 5, 1999
F-3
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Years ended December 31,
----------------------------------
1997 1998
--------------- ---------------
Assets
Current assets
Cash and cash equivalents........... $ 2,323,559 $ 1,009,768
Accounts receivable, net ........... 455,340 1,264,526
Inventory........................... 118,700 243,413
Deposits............................ 342,096 125,784
Prepaid and other assets............ 271,338 594,777
Notes receivable from
officers (Note 7)................. 136,194 77,330
-------------- -------------
Total current assets................... 3,647,227 3,315,598
-------------- -------------
Property, equipment and leasehold
improvements (Notes 1 and 3)........ 5,008,835 24,130,663
Less: Accumulated depreciation
and amortization.................... (2,553,347) (4,396,229)
-------------- -------------
Property, equipment and leasehold
improvements, net................... 2,455,488 19,734,434
-------------- -------------
Cost in excess of net assets acquired,
net of accumulated amortization of
$7,370 at December 31, 1997 (Note 4) 116,415 -
Direct acquisition costs (Note 11)..... 258,133 -
Deferred financing costs, net of
amortization of $80,813(Note 11).... - 1,039,187
-------------- ------------
$ 6,447,263 $24,089,219
============== ============
Liabilities and Stockholders' Equity
Current liabilities
Working capital line (Note 3)....... $ - $ 999,679
Accounts payable and accrued expenses 880,286 2,533,232
Accrued payroll and other liabilities 698,499 1,891,924
Current maturities of long-term
debt (Note 3)...................... 271,918 14,682,246
-------------- -----------
Total current liabilities............. 1,850,703 20,107,081
-------------- -----------
Long-term debt, less current
maturities (Note 3)................. 550,332 786,468
-------------- -----------
Total liabilities..................... 2,401,035 20,893,549
-------------- -----------
F-4
<PAGE>
Commitments and contingencies (Note 4)
Stockholders' equity (deficit) (Notes 3
and 5)
Preferred stock, par value $1 per share,
1,000,000 shares authorized; none
issued and outstanding............... - -
Common stock; par value $0.01
per share; authorized 25,000,000
shares 6,595,500 and 7,452,350 shares
issued and outstanding............... 65,955 74,523
Additional paid-in capital.......... 7,340,013 11,254,587
Accumulated other comprehensive
income
Currency exchange adjustment....... - 67,289
Accumulated deficit................. (3,329,740 ) (8,200,729)
-------------- -----------
Total stockholders' equity............. 4,076,228 3,195,670
-------------- -----------
$ 6,477,263 $24,089,219
============== ===========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
---------------------------------
1997 1998
--------------- --------------
Net revenues............................. $ 15,726,074 $ 27,847,476
Direct production costs.................. 11,413,524 22,228,524
--------------- --------------
Gross profit............................. 4,312,550 5,618,952
--------------- --------------
Operating expenses
Selling, general and administrative..... 4,946,135 6,276,325
Depreciation and amortization........... 982,180 1,806,526
Impairment loss (Note 12)............... - 409,117
Expenses at discontinued location
(Note 8)................................ 489,285 443,096
--------------- --------------
Total operating expenses................. 6,417,600 8,935,064
--------------- --------------
Operating loss........................... (2,105,050) (3,316,112)
Interest expense, net (See Note 9)...... 834,333 1,554,877
--------------- --------------
Loss before income taxes................. (2,939,383) (4,870,989)
Income taxes (Note 10)................... 6,673 -
--------------- --------------
Net loss................................. $ (2,946,056) $ (4,870,989)
--------------- --------------
Basic loss per share..................... $ (0.55) $ (0.68)
--------------- --------------
Diluted loss per share................... $ (0.55) $ (0.68)
--------------- --------------
Basic average number of common
shares outstanding...................... 5,365,851 7,191,276
--------------- --------------
Diluted average number of common
shares outstanding...................... 5,365,851 7,191,276
--------------- --------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS STOCKHOLDER'S EQUITY (DEFICIT)
Accumulated
Other
Comprehensive
Shares Amount Capital Income
---------- ----------- ----------- ----------
Balance, December 31, 1996.. $ 4,002,044 $ 40,020 121,024 $ -
Issuance of common stock
in connection with the
bridge financing (Note 3).. 195,500 1,956 364,344 -
Issuance of common stock
to officer (Note 4)........ 40,532 405 161,724 -
Warrant exchange (Note 5)... 440,755 4,408 (4,408) -
Issuance of common stock
in connection with
Interactive Events
acquisition (Note 5)........ 11,020 110 60,500 -
Issuance of common stock
in connection with the
initial public offering
(Note 5).................... 1,400,000 14,000 4,841,975 -
Issuance of common stock
in connection with the
Debentures conversion
(Note 3).................... 505,649 5,056 1,794,854 -
Net loss for the year........ - - - -
- - --------------------------------------------------------------------------------
Balance, December 31, 1997... 6,595,500 65,955 7,340,013 -
Issuance of common stock in
connection with Gedco
acquisition (Note 11)....... 595,238 5,952 2,494,048 -
Issuance of common stock
in connection with Fox
Family acquisition (Note 11). 206,612 2,066 721,076 -
Issuance of common stock
in connection with
private placement (Note 5).. 55,000 550 54,450 -
Issuance of warrants in
connection with financing
(Note 11)................... - - 645,000 -
Comprehensive loss:
Net loss for the year....... - - - -
Currency exchange adjustment - - - 67,289
---------- ---------- --------- ----------
Comprehensive loss........... - - - -
---------- ---------- --------- ----------
Balance, December 31, 1998... $7,452,350 $ 74,523 $11,254,587 $ 67,289
=========== ========== ========== ==========
F-7
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
Accumulated Comprehensive
Deficit Loss Total
----------- ----------- -----------
Balance, December 31, 1996.. $ (383,684) $ - $ (222,640)
Issuance of common stock
in connection with the
bridge financing (Note 3).. - - 366,300
Issuance of common stock
to officer (Note 4)........ - - 162,129
Warrant exchange (Note 5)... - - -
Issuance of common stock
in connection with
Interactive Events
acquisition (Note 5)........ - - 60,610
Issuance of common stock
in connection with the
initial public offering
(Note 5).................... - - 4,855,975
Issuance of common stock
in connection with the
Debentures conversion
(Note 3).................... - - 1,799,910
Net loss for the year........ (2,946,056) (2,946,056) (2,946,056)
Balance, December 31, 1997... (3,329,740) (2,946,056) 4,076,228
Issuance of common stock in
connection with Gedco
acquisition (Note 12)....... - - 2,500,000
Issuance of common stock
in connection with Fox
Kids acquisition (Note 12).. - - 723,142
Issuance of common stock
in connection with
private placement (Note 5).. - - 55,000
Issuance of warrants in
connection with financing
(Note 12)................... - - 645,000
Comprehensive loss:
Net loss for the year....... (4,870,989) (4,870,989) (4,870,989)
Currency exchange adjustment. - 67,289 67,289
---------- ---------- ---------
Comprehensive loss........... (4,870,989) $(4,803,700) (880,558)
---------- ---------- ---------
Balance, December 31, 1998... $8,200,729 $(7,749,756) $3,195,670
========== ========== =========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-8
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Years ended December 31,
---------------------------------
1997 1998
-------------- --------------
Cash flows from operating activities
Net loss ............................. $ (2,946,056) $ (4,870,989)
Adjustments to reconcile net
loss to net cash used in operating
activities:
Depreciation and amortization......... 676,306 1,085,766
Write off of cost in excess of
net assets acquired................... - 102,131
Write off of deferred financing costs. - 275,000
Impairment loss....................... - 852,213
Interest paid in common stock......... 194,228 -
Loss on disposal of property
and equipment........................ (10,834) -
Issuance of common stock to officer... 162,129 -
Non-cash interest..................... 366,300 -
Reverse litigation accrual............ (25,000) -
Forgiveness of note receivable
from stockholder..................... 221,521 -
Increase (decrease) from changes in
operating assets and liabilities:
Accounts receivable................... 46,723 (809,187)
Inventory............................. (50,847) (4,629)
Deposits.............................. (110,495) 216,312
Pre-opening costs..................... 129,180 -
Prepaid and other assets.............. (35,043) (165,923)
Accounts payable and accrued expenses. 281,243 591,900
Accrued payroll and other liabilities. 76,513 1,193,426
Litigation settlement accrual......... (75,000) -
------------ ------------
Total adjustments........................ 1,846,924 3,337,004
------------ ------------
Net cash used in operating activities.... (1,099,132) (1,533,980)
------------ ------------
F-9
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(continued)
Years ended December 31,
---------------------------------
1997 1998
-------------- --------------
Cash flows from investing activities
Advances on notes receivable
from officers........................... (357,715) (69,024)
Pay down on note receivable from
officers................................ - 127,888
Capital expenditures.................... (625,612) (947,165)
Payment for acquisitions, net of
cash acquired........................... - (14,602,005)
Direct acquisition costs................ (258,133) 942,063
------------ ------------
Net cash used in investing activities.... (1,241,460) (14,548,243)
------------ ------------
Cash flows from financing activities:
Borrowing under working capital line.... - 1,000,000
Proceeds from long-term borrowing....... - 13,860,007
Repayment on long-term borrowing........ (1,140,376) (213,864)
Proceeds from bridge notes.............. 875,000 -
Payments of bridge notes................ (875,000) -
Net proceeds from sale of common
stock and warrants...................... 4,855,975 55,000
Offering costs.......................... 657,801 -
------------ -----------
Net cash provided by financing activities 4,373,400 14,701,143
------------ -----------
Effect of exchange rate charges on cash
and cash equivalents.................... $ - $ 67,289
Net increase (decrease) in cash
and cash equivalents..................... 2,032,808 (1,313,791)
Cash and cash equivalents at
beginning of year........................ 290,751 2,323,559
------------ -----------
Cash and cash equivalents at end of year. $ 2,323,559 $ 1,009,768
------------ -----------
Supplemental Disclosure of Cash
Flow Information
Cash paid during the year for:
Interest.............................. $ 278,059 $ 1,551,574
Taxes................................. $ 6,673 $ 44,111
============= ===========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-10
<PAGE>
Supplemental Schedule of Non-Cash Investing and Financing Activities
During 1997 and 1998, $712,405 and $1,000,000 of leased assets and obligations
were capitalized, respectively.
During 1997, the Company borrowed an aggregate of $1,000,000 from 21 private
investors, in return for which the Company issued to such investors unsecured
non-negotiable notes payable, which accrued interest at an annual rate of 9% and
which matured upon the consummation the initial public offering (the "Bridge
Notes"), Common Stock and warrants (collectively, the "Bridge Financing"). The
Common Stock issued in connection with the Bridge Financing was valued at
$366,300. As no consideration was paid for the Common Stock, this amount is
considered an original issue discount and amortized over the term of the Bridge
Notes.
During 1997, the Company exchanged all of its outstanding warrants for 440,755
shares of Common Stock, which had no effect on the Company's earnings.
During 1997, the Company sold equipment with a historical cost of approximately
$55,000 at a gain. The Company accepted a note receivable as payment for the
sale.
Upon the consummation of the Company's initial public offering, 1,799,910 of
outstanding convertible debentures were converted into 505,549 shares of common
stock.
During 1997, the Company issued 11,020 shares of common stock in connection with
the Interactive Events acquisition.
During 1998, in connection with mortgage financing related to the Gedco
Acquisition, the Company issued 575,000 warrants to purchase the Company's
Common Stock to the lender and an affiliate of the lender, which were originally
valued at $500,000 and accounted for as an original issue discount. Of the
575,000 warrants originally issued, 325,000 were subsequently repriced (see Note
3) and were valued at $145,000 and accounted for as an original issue discount.
The Company wrote off the remaining unamortized value of the 325,000 warrants of
$275,000.
F-11
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
BUSINESS ACTIVITY
On Stage Entertainment, Inc. (the "Company") produces and sells live
entertainment and operates live theaters and dinner theaters worldwide. The
Company has continuous running shows in gaming and resort venues in California,
Florida, Missouri, Nevada, New Jersey, Pennsylvania and South Carolina. The
Company was incorporated on October 30, 1985 in the state of Nevada.
PRINCIPLES OF CONSOLIDATION
The financial statements include the amounts of On Stage Entertainment, Inc., a
publicly traded Nevada corporation (the "Company" or "OSE") and its
subsidiaries, Legends in Concert, Inc., a Nevada corporation ("LIC"); On Stage
Marketing, Inc., a Nevada corporation ("Marketing"); On Stage Theaters, Inc., a
Nevada corporation ("Theaters"); Wild Bill's California, Inc., a Nevada
corporation ("Wild Bills"); Fort Liberty, Inc., a Nevada corporation ("Ft.
Liberty"); Blazing Pianos, Inc., a Nevada corporation ("Blazing"); King Henry's
Inc., a Nevada corporation ("King Henry"s"); On Stage Merchandise, Inc., a
Nevada corporation ("Merchandise"); On Stage Events, Inc., a Nevada corporation
("Events"); On Stage Casino Entertainment, Inc. a Nevada corporation ("Casino");
On Stage Productions, Inc., a Nevada corporation ("Productions"); On Stage
Theaters North Myrtle Beach, Inc., a Nevada corporation ("North Myrtle"); On
Stage Theaters Surfside Beach, Inc., a Nevada corporation ("Surfside"); and
Interactive Events, Inc., a Georgia corporation (collectively, the
"Subsidiaries"). All significant intercompany transactions and balances have
been eliminated in consolidation. The consolidated group is referred to
collectively and individually as the "Company."
ACCOUNTS RECEIVABLE
Accounts receivable and revenue are recorded as the stage productions are run.
Accounts receivable represents cash collected subsequent to the year-end in
which the show ran.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statement and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-12
<PAGE>
INVENTORY
Inventory consists of various stage and lighting supplies and are stated at cost
on a first-in, first-out basis.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Renewals or betterments of
significant items are capitalized. When assets are sold or otherwise disposed,
the cost and related accumulated depreciation or amortization are removed from
the respective accounts, and any resulting gain or loss is recognized.
Depreciation and amortization of property and equipment purchased prior to
January 1, 1996 are provided using accelerated methods while property and
equipment purchased from January 1, 1996 are depreciated on a straight line
basis over the estimated useful lives, as indicated below. Leasehold
improvements are amortized over the lesser of the related assets useful life or
the remaining lease term.
Years
--------------------
Buildings.................................... 20
Stage equipment.............................. 5-7
Scenery and wardrobe......................... 5-7
Furniture and fixtures....................... 5-7
Vehicles..................................... 3
Leasehold improvements....................... 10
IMPAIRMENT OF LONG-LIVED ASSETS
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of" ("SFAS No. 121") which is
effective for financial statements for fiscal years beginning after December 15,
1995. This standard establishes guidelines regarding when impairment losses on
long-lived assets, which include plant and equipment, and certain identifiable
intangible assets, should be recognized and how impairment losses should be
measured. The Company adopted this accounting standard on January 1, 1996 and is
applying the concepts to intangibles and productive assets periodically (see
Notes 12).
STOCK BASED COMPENSATION
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from non-employees in exchange for equity
instruments. The Company adopted this accounting standard on January 1, 1996.
SFAS No. 123 also encourages, but does not require companies to record
compensation cost for stock-based employee compensation. The Company has chosen
to continue to account for stock-based compensation utilizing the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees, and comply with pro forma disclosure
requirements." Accordingly, compensation cost for stock options is measured as
the excess, if any, of the fair market price of the Company's stock at the date
of grant over the amount an employee must pay to acquire the stock.
F-13
<PAGE>
LOSS PER SHARE
Statement of Financial Accounting Standard No. 128 provides a different method
of calculating earnings per share than is currently used in accordance with APB
15, Earnings per Share. SFAS 128 provides for the calculation of Basic and
Diluted earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the
earnings of the entity, similar to fully diluted earnings per share. SFAS 128 is
effective for fiscal years and interim periods after December 15, 1997. The
Company has adopted this pronouncement during the fiscal year ended December 31,
1997.
For the years ended December 31, 1998 and 1997, potential diluted securities
representing 896,344 and 720,938 outstanding options and 2,724,917 and 2,077,000
outstanding warrants are not included since their effect would be anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Statements", ("SFAS No. 107") issued by the FASB became
effective December 31, 1995. This statement requires the disclosure of estimated
fair values for all financial instruments for which it is practicable to
estimate fair value.
The carrying amounts of financial instruments including cash, accounts
receivable, current maturities of long-term debt, and accounts payable,
approximate fair value because of their short maturity.
The carrying amount of long-term debt approximates fair value because the
interest rates on these instruments approximate the rate the Company could
borrow at December 31, 1998.
The Company has notes receivable from officers of the Company. Due to the
related-party nature of these receivables the fair value cannot be determined.
INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109 ("SFAS
No. 109"), "Accounting for Income Taxes." SFAS No. 109 requires an asset and
liability approach to providing deferred income taxes and specifies that all
deferred tax balances be determined by using the tax rate expected to be in
effect when the taxes will actually be paid or refunds received.
F-14
<PAGE>
CASH EQUIVALENTS
The Company considers all liquid assets with an initial maturity of three months
or less to be cash and/or cash equivalents.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign affiliates are translated at
current exchange rates, while revenue and expenses are translated at average
rates prevailing during the year. Translation adjustments are reported as a
component of other comprehensive income in stockholders' equity.
CONCENTRATION OF CREDIT RISK
The Company places its cash and temporary cash investments with banking
institutions. At December 31, 1997 and 1998, the Company had $2,600,788 and
$252,910 on deposit at one bank. Account balances at an individual bank are
insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company adopted SFAS No. 130 as of
January 1, 1998 and it had no effect on its financial position or results of
operations.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131") issued by the FASB is
effective for financial statements with fiscal years beginning after December
15, 1997. Earlier application is permitted. SFAS No. 131 requires that the
public companies report certain information about operating segments, products,
services and geographical areas in which they operate and their major customers.
The Company adopted SFAS No. 131 on January 1, 1998 and it had no effect on its
financial position or results of operations; however, disclosures on certain of
these items was expanded.
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities,"
("SOP 98-5") issued by the American Institute of Certified Public Accountants is
effective for financial statements beginning after December 15, 1998. SOP 98-5
requires that the costs of start-up activities, including organization costs, be
expensed as incurred. Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
F-15
<PAGE>
class of customers (excluding ongoing customer acquisition costs, such as policy
acquisition costs and loan origination costs) or beneficiary, initiating a new
process in an existing facility, or commencing some new operation. The Company
does not expect the adoption of SOP 98-5 to have a material impact, if any, on
its financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" effective for financial statements with
fiscal years beginning after June 15, 1999. SFAS No. 133 provides a
comprehensive and consistent standards for the recognition and measurement of
derivatives and hedging activities and requires all derivatives to be recorded
on the balance sheet at fair value. The Company does not expect the adoption of
SFAS No. 133 to have a material impact, if any, on its results of operations,
financial position or cash flows.
RECLASSIFICATIONS
Certain 1997 amounts have been reclassified to conform to the 1998 presentation.
F-16
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
December 31,
------------------------------
1997 1998
------------- -------------
Land................................... $ - $ 11,329,376
Buildings.............................. - 4,389,287
Stage equipment........................ 2,267,456 3,743,769
Scenery and wardrobe................... 1,047,750 1,286,957
Furniture and fixtures................. 1,002,674 1,134,555
Vehicles............................... 12,757 12,757
Leasehold improvements................. 678,198 2,233,962
------------- -------------
5,008,835 24,130,663
Less accumulated depreciation
and amortization...................... (2,553,347) (4,396,229)
------------- -------------
Total property, equipment and leasehold
improvements, net.......................... $ 2,455,488 $ 19,734,434
============ ============
The cost of assets held under capital leases was $1,008,432 and $2,008,432 at
December 31, 1997 and 1998, respectively.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The carrying amounts of assets and liabilities presented in the
financial statements do not purport to represent realizable or settlement
values. However, the Company has suffered recurring operating losses and has a
working capital deficit of $16,791,000 that impairs its ability to obtain
additional financing and is in default on its long term debt. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements include any adjustments that
might result from the outcome of those uncertainities.
The Company has historically met its working capital requirements through a
combination of cash flow from operations, equity and debt offerings and
traditinoal bank financing. The Company anticipates, based on its proposed plans
and assumptions relating ot its operations that the Company's current cash, cash
equivalent balances, anticpated revenues from operations are insufficient to
fund the Company's ongoing operations.
The Company intends to manage short-term liquidity concerns through the
renegotiations of its expired working capital line, capital leases and mortgage
facilities. The Company has either closed down or restructed any business units
that are not generating positive cash flow. In addition, the Company has lowered
selling, general and administrative costs as a percent of net revenues from 32%
in 1997 to 22% in 1998 and continues to downsize and restructure its selling,
general and administrative functions.
F-17
<PAGE>
NOTE 2 - GOING CONCERN (continued)
In addition, the Company is continuing its efforts to secure working capital for
operations, expansion and possible acquisitions, mergers, joint ventures, and/or
other business combinations. However, there can be no assurance that the Company
will be able to secure additional capital or that if such capital is available,
whether the terms or conditions would be acceptable to the Company.
NOTE 3 - WORKING CAPITAL LINE, NOTES PAYABLE AND LONG-TERM DEBT
WORKING CAPITAL LINE
In May 1997, First Security Bank of Nevada ("First Security") issued a line of
credit to the Company for up to $250,000. Borrowings under such facility bear
variable interest at 1.5% over the First Security Bank of Idaho's index (9.25%
at December 31, 1998). On September 28, 1998, First Security increased the line
of credit from $250,000 to $1,000,000 and extended the expiration date of the
line to March 25, 1999. As of December 31, 1998, the Company had drawn
$1,000,000 on the line of credit and the balance outstanding at December 31,
1998 is $999,679. The CEO has personally guaranteed the line of credit.
Long-term debt consists of the following:
December 31,
--------------------------------
1997 1998
------------- --------------
ICCMIC Mortgage Loan (a).................. $ - $ 14,150,000
Capital lease obligations with interest ranging from 9.7% to 30.7% due in
monthly installments ranging from $265 to $18,202, including interest various
maturities dates through November 2001, secured by office communication
equipment, and production equipment...... 822,250 1,318,714
-------------- --------------
Total long-term debt...................... 822,250 15,468,714
Less current maturities................... 271,918 14,682,246
-------------- --------------
$ 550,332 $ 786,468
============== ==============
F-18
<PAGE>
NOTE - 3 WORKING CAPITAL LINE (Continued)
As of December 31, 1998 the future minimum principal debt payments and lease
payments under capital leases are as follows:
Year ending ICCMIC Capital
December 31, Loan Leases
----------------- -------------- ---------------
1999............................... $ 14,150,000 $ 638,227
2000............................... - 597,541
2001............................... - 250,751
-------------- ---------------
$ 14,150,000
==============
Total.................................. 1,486,519
===============
Less: Amounts representing
interest costs........................ 167,805
---------------
Net present values..................... 1,318,714
Less: Capital lease obligations
included in short-term debt.......... 532,246
---------------
Long-term capital lease obligations.... $ 786,468
===============
F-19
<PAGE>
NOTE 3 - WORKING CAPITAL LINE, NOTES PAYABLE AND LONG-TERM DEBT (Continued)
WORKING CAPITAL LINE (Continued)
(a) The Company funded the cash portion of the Gedco Acquisition purchase price
and transaction fees and expenses with $12.5 million of mortgage financing from
Imperial Credit Commercial Mortgage Investment Corp ("ICCMIC")(see Note 11).
This note is due March 13, 2029 paid monthly at an interest rate of 9.75%. In
connection with the financing, the Company issued ICCMIC and Imperial Capital
Group LLC (an affiliate of ICCMIC), an aggregate of 575,000 warrants immediately
exercisable into shares of Common Stock at an exercise price of $4.44. These
warrants were valued at $500,000 and accounted for as an original issue
discount. Additionally, the Company funded the cash portion of the "Fox
Acquisition" (see Note 11) with $1,000,000 of mortgage financing from "ICCMIC."
The note is due June 30, 2029 paid monthly at a rate of 10.28%.
On October 7, 1998, ICCMIC loaned the Company an additional $550,000, secured by
a first deed of trust on the Company's Legends in Concert Theater in Surfside
Beach, South Carolina. In connection with this additional financing, the Company
modified the Common Stock purchase warrant that the Company issued to ICCMIC on
March 13, 1998 (and the corresponding warrant agreement) by reducing the
exercise price of ICCMIC's 325,000 warrants to purchase shares of the Company's
Common Stock from $4.44 per share to $1.25 per share. The re-priced warrants
were valued at $145,000 and accounted for as an original issue discount. The
Company wrote off the remaining unamortized original value of the 325,000
warrants of $275,000.
Default
During 1995, the Company conducted a private placement of debentures originally
due on August 31, 1997, (the "Original Debentures") with aggregate proceeds of
$1,989,064 (the "1995 Private Placement"). In order to (i) extend the maturity
date of the Original Debentures and (ii) eliminate certain covenants in the
Original Debentures that were disadvantageous to the Company, the Company
offered to either (a) exchange the outstanding Debenture Units for Debentures
due January 4, 1999, or (b) to repurchase the Debenture Units upon the terms and
subject to the conditions set forth in an Offer to Exchange or Repurchase the
Debenture Units (the "Exchange or Repurchase Offer"). In connection with the
Exchange or Repurchase Offer, the holders of $1,714,064 principal amount of the
Original Debentures tendered their Debenture Units in exchange for Debentures in
the same principal amount and holders of $275,000 principal amount of the
Original Debentures opted to have them repurchased. On August 13, 1997, the
Company converted the entire $1,714,064 principal amount of Debentures into an
aggregate of 505,649 shares of Common Stock. The aforementioned conversion was
based upon a ratio of 295 shares of
F-19
<PAGE>
NOTE 3 - WORKING CAPITAL LINE, NOTES PAYABLE AND LONG-TERM DEBT (Continued)
WORKING CAPITAL LINE (Continued)
Common Stock per each $1,000 principal amount of Debentures. The conversion
resulted in a one time, non-recurring, interest expense charge in the amount of
$194,228 (based on an imputed value of $ 4.00 per share of Common Stock).
On February 29, 1996, the Company entered into a loan agreement with DYDX
Legends Group, L.P. ("DYDX") pursuant to which the Company borrowed $1,000,000
from DYDX (the "DYDX Loan"). The DYDX Loan accrued interest at a rate of 8% per
annum, was to mature on January 1, 1998 and was secured by a security agreement
pursuant to which DYDX had a lien on substantially all of the present and future
assets of the Company. In addition, if the Company did not file an initial
public offering registration statement by June 30, 1996, it would be in default
under the DYDX Loan.
The Company and DYDX entered into several extension agreements, one of which
included the repayment of $250,000.
In order to effect the Bridge Financing, the Company and DYDX entered into an
Amended and Restated Loan Agreement as of March 19, 1997 in connection with
which the security agreement executed in connection with the DYDX Loan and
DYDX's security interest in the Company's assets were terminated, the maturity
date of the DYDX Loan was extended to coincide with that of the Bridge Notes and
its interest rate was raised to 9% per annum. On August 13, 1997, the Company
paid off, in full, all outstanding principal and accrued interest, $773,014,
owed by the Company under the DYDX loan.
Bridge Financing
On March 26, 1997, Company completed a Bridge Financing of $1,000,000 of
unsecured non-negotiable notes, common stock and warrants through the Company's
underwriter, Whale Securities Co., L.P. (the "Placement Agent"). The net
proceeds to the Company after deducting the Placement Agent's commissions and
other offering expenses were $875,000. The common stock was assigned a value of
$444,000 less expenses of $77,700 resulting in a credit to equity of $366,300.
As no consideration was paid for the common stock, this amount is considered an
original issue discount and interest expense over the term of the related notes
payable. On August 13, 1997, the Company paid off, in full, all outstanding
principal and accrued interest, $1,036,746, owed by the Company under the Bridge
Notes.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases various offices, condominiums, warehouses and theaters under
operating leases ranging in monthly payments from $1,026 to $5,000. Rent and
lease expense included in cost of revenues for the years ended December 31, 1997
and 1998 was $595,425 and $1,301,771, respectively. Rent and lease expense
included in selling, general and administrative expense for the years ended
December 31, 1997 and 1998 was $252,905and $323,048, respectively.
F-20
<PAGE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
The total minimum rental commitment at December 31, 1998 is as follows:
Year ending
December 31, Amount
-------------------- --------------
1999.............................................. $ 1,223,346
2000.............................................. 1,166,987
2001.............................................. 1,048,471
2002.............................................. 1,017,408
2003.............................................. 547,421
Thereafter........................................ 4,496,638
--------------
$ 9,500,271
==============
Employment Contracts
On February 1, 1997, the Company entered into an employment agreement with the
principal stockholder to employ him as its Chairman of the Board and Chief
Executive Officer until May 31, 2000. In accordance with this employment
agreement, the principal stockholder will receive an annual salary of $250,000.
and may be entitled to receive an annual 10% increase of his base salary amount.
The Company has the right to terminate the principal stockholder's employment at
any time without cause, provided that the Company pays the principal stockholder
a lump sum payment equal to one year's base salary, car allowance and insurance
allowance. Also in February 1997, the Company amended the employment agreements
with the CFO and the President which, among other things, extended their current
employment agreements through May 31, 2000. In connection with each of their
respective employment agreements, the CEO, President and CFO also entered into
confidentiality and non-competition agreements with the Company.
The Company has employment agreements with certain executive officers and
employees, the terms of which expire at various dates through May, 2000. Such
agreements provide for minimum salary levels and incentive bonuses based on
prescribed formulas over their terms.
Aggregate commitments related to employment contracts are as follows:
Year ending
December 31, Amount
-------------------- -------------
1999............................................$ 668,940
2000............................................ 320,270
2001............................................ 47,482
-------------
$ 1,036,692
=============
Executive Bonus Plan
In March 1997, the Company implemented a three-year Executive Bonus Plan,
administered by the Board of Director's Compensation Committee. Under the
Executive Bonus Plan, an annual bonus pool of up to 5% of the Company's audited
pre-tax earnings, after non-recurring charges such as original issue discount,
F-21
<PAGE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
compensation and interest expense charges, but excluding extraordinary items
("Pre-Tax Earnings"), may be established for distributions at the discretion of
the Company's Board of Directors, to the Company's executive officers (other
than the Chairman and CEO who is not eligible for bonuses under the Executive
Bonus Plan) in 1998, 1999 and 2000, provided that the Company achieves at least
minimum Pre-Tax Earnings for the respective preceding year as follows:
Minimum
Year ending Pre-Tax
December 31, Earnings
-------------------- --------------
1998...........................................$ 5,000,000
1999........................................... 8,700,000
2000........................................... 8,900,000
--------------
$ 22,600,000
==============
Legal Proceedings
The Company is a party to various legal proceeding in the ordinary course of its
business. The Company believes that the nature of the proceedings are typical
for a company of its size and scope in the entertainment industry, and that none
of these proceedings are material to its financial position, results of
operations and changes in cash flows.
NOTE 5 - STOCKHOLDER'S EQUITY
Initial Public Offering
On August 13, 1997, the Company completed an initial public offering of
1,400,000 shares of Common Stock at $5.00 per share and redeemable warrants to
purchase 1,610,000 shares of Common Stock at $0.10 per warrant (the "IPO"). The
net proceeds to the Company of the offering after underwriting discounts,
commissions and expenses was approximately $4,855,975.
Stock Split
On March 18, 1997, the Company effectuated a 1 for 1.814967 reverse stock split
of the Company's common stock ("Reverse Split"). Accordingly, $29,828 was
transferred from accumulated deficit to common stock and the Company has retired
26,422 of the principal stockholder's shares of common stock. All common shares,
common stock warrants, options and grants and income (loss) per share
information disclosed in the financial statements and notes have been adjusted
to give effect to the Reverse Split and the retirement of the principal
stockholder common stock.
DY/DX Corp. Common Stock Purchase Agreement
On October 2, 1998, the Company entered into a stock purchase agreement with
DY/DX Corp., an Illinois corporation, to sell up to 500,000 shares of the
Company's common stock at an aggregate purchase price of $500,000. As of
December 31, 1998, DY/DX Corp. had purchased 55,000 shares of the Company's
common stock pursuant to this agreement.
F-22
<PAGE>
NOTE 5 - STOCKHOLDER'S EQUITY (Continued)
Warrants Converted to Common Stock
In connection with the closing of the DYDX Loan and subsequent extensions (see
Note 3), the lender was issued warrants to purchase 550,974 shares of the
Company's common stock in February 1996 at an original exercise price per share
equal to the initial public offering price of the Company's common stock (the
"DYDX Warrant"). In connection with the Third Extension of the DYDX Loan, the
Company split the DYDX Warrant into two warrants, one in the name of DYDX for
the purchase of 440,779 shares of Common Stock and the other in the name of an
affiliate of DYDX, for the purchase of 110,195 shares of Common Stock, and
reduced the exercise price of both warrants to $3.99 per share, which
approximates fair market value at the date of the reduction.
On March 17, 1997, the Company exchanged all of its outstanding warrants for
shares of its common stock (the "Warrant Exchange Shares") on a cashless basis
(the "Warrant Exchange"). The number of Warrant Exchange Shares issued to each
warrant holder in the Warrant Exchange was equal to the number of warrants held
by such holder divided by the exercise price of the holder's warrants, based on
the number and price of the warrants prior to the Reverse Split. As a result of
the Warrant Exchange, all of the Company's currently outstanding warrants were
canceled and exchanged for a total of 799,956 Warrant Exchange Shares on a
pre-Reverse Split basis, which amount was reduced to 440,755 shares in
connection with the Reverse Split. The Warrant Exchange had no effect upon the
Company's earnings.
1996 Stock Option Plan
The Board of Directors and the Company's then sole stockholder approved the
Company's Incentive Stock Option Plan on August 7, 1996 (the "Option Plan").
Pursuant to an amendment to the Option Plan, effected on March 19, 1997, an
aggregate of 785,000 shares of common stock have been reserved for issuance
pursuant to options granted and available for grant under the Option Plan. The
Option Plan is designed to further the interests of the Company by incentivizing
their employees to continue to work for the betterment of the Company in return
for sharing in the success of the Company through the Option Plan.
Under the Option Plan, a committee (the "Committee") has been appointed by the
Board of Directors to administer the Option Plan and is authorized to grant
options thereunder to all eligible employees of the Company, including certain
officers and directors of the Company as well as to others providing services to
the Company. The Option Plan provides for the granting of both: (i) "incentive
stock options" as defined in Section 422 of the Internal Revenue Code of 1986,
as amended, which are intended to qualify for special federal income tax
treatment ("ISOs") to employees (including officers and employee directors) and
(ii) "non-qualified stock options" ("NQSOs") to employees (including officers
and employee directors) non-employee directors, and consultants. Options can be
granted under the Option Plan on such terms and at such prices as determined by
the Committee, except that in the case of ISOs, the per share exercise price of
such options cannot be less than the fair market value of the Common Stock on
the date of grant. In the case of an ISO granted to a 10% stockholder (a "10%
Stockholder"), the per share exercise price cannot be less than 110% of such
fair market value. To the extent that the grant of an option results in the
aggregate fair market value of the shares with respect to which incentive stock
options are exercisable by a grantee for the first time in any calendar year
exceed $100,000, such option will be treated under the Option Plan as an NQSO.
Options granted under the Option Plan will become exercisable after successful
completion of the vesting period or periods specified in each option agreement.
Except as otherwise determined by the Committee, options become exercisable as
to one-third of the shares subject to the option on each of the first, second
and third anniversaries of the date of grant of the option. Options are not
exercisable, however, after the expiration of ten years from the date of grant
(or five years from such date in the case of an ISO granted to a 10%
Stockholder) and are not transferable other than by will or by the laws of
descent and distribution.
F-23
<PAGE>
NOTE 5 - STOCKHOLDER'S EQUITY (Continued)
Except as the Committee may determine with respect to NQSOs, if the holder of an
option granted under the Option Plan ceases to be an employee, options granted
to such holder shall terminate three months (12 months if the termination is a
result of the death or disability of the employee) from the date of termination
of employment and shall be exercisable as to only those options exercisable as
of the date of termination.
In March 1996, the Company hired a new President and Chief Operating Officer
(the "President"). As part of the new President's employment agreement, the
Company granted him options to purchase 311,300 shares of the Company's common
stock. The President has elected to classify 75,132 of the options as ISOs which
vest in three equal annual installments commencing on the date of the grant. The
remaining 236,168 are to be classified as NQSOs, of which one-half vest
immediately, one-quarter vest on the first anniversary of the grant date, and
the balance vest on the second anniversary of such grant. The exercise price of
all of the President's stock options is $3.99 per share, which was the fair
value at the date of grant.
In August and December 1996, the Company granted options to purchase a total of
120,359 shares of the Company's common stock to certain other employees of the
Company. These options were granted under the Company's 1996 Stock Option Plan
and have an exercise price of $5.00 per share. Unless otherwise determined by
the Committee, the options have a term of ten years from the date of grant and
are subject to earlier termination in certain events related to the termination
of employment. The options vest in three equal annual installments commencing on
the first anniversary of the date of the grant.
In February 1997, the CFO entered into an amended employment agreement under
which he was granted 85,000 additional stock options (see Note 4).
Non-employee Directors' Options
In March 1997, the Company provided for each non-employee director of the
Company to receive, in addition to reimbursement of expenses incurred in
attending Board meetings, an option to purchase 10,000 shares of Common Stock
each year that he or she serves as such a director (each such year, a "Grant
Year"), partially contingent upon the director's attendance at the Company's
four scheduled Board of Director meetings during the Grant Year. One-quarter of
the annual option grant shall vest as of each of the Grant Year's first three
scheduled Board of Director meetings and the remainder of such option will vest
as of the fourth scheduled meeting, provided, in the latter case, that the
director has attended all four of that Grant Year's scheduled Board meetings.
In June 1998, the Company increased its number of shares of common stock
reserved for issuance pursuant to the exercise of options under the option Plan
from 765,000 to 1,400,000 options.
F-24
<PAGE>
NOTE 5 - STOCKHOLDER'S EQUITY (Continued)
Non-employee Directors' Options (Continued)
The option and warrant activity during the years ended December 31, 1997 and
1998 is as follows:
Weighted
Number of Average
Options Exercise
and Warrants Price
-------------- -------------
Outstanding at December 31, 1996............ $ 456,453 $ 4.31
Cancelled................................... (8,000) (5.00)
Granted..................................... 2,790,240 5.63
Exercised................................... (440,755) (5.00)
-------------- -------------
Options and warrants outstanding
at December 31, 1997....................... 2,797,938 5.52
Granted...................................... 1,399,511 2.33
Canceled..................................... (576,188) (4.31)
-------------- -------------
Options and warrants outstanding
at December 31, 1998....................... $ 3,621,261 $ 3.90
-------------- -------------
Options and warrants exercisable
at December 31, 1998....................... $ 3,480,845 $ 4.06
-------------- -------------
Information relating to stock options and warrants at December 31, 1998
summarized by exercise price are as follows:
Outstanding Exercisable
Exercise Weighed Average Weighed Average
Price ---------------------------------------- -----------------------
Share Shares Life (Year) Exercise Price Shares Exercise Price
- - ---------- -------- ----------- -------------- -------- --------------
$1.25 325,000 4.3 $1.25 325,000 $1.25
$1.50 664,094 9.7 $1.50 664,094 $1.50
$4.38 75,000 9.5 $4.38 - $4.38
$4.44 250,000 4.3 $4.44 250,000 $4.44
$5.00 230,167 8.8 $5.00 164,751 $5.00
$5.50 1,822,500 3.5 $5.50 1,822,500 $5.50
$8.25 114,500 3.5 $8.25 114,500 $8.25
$9.08 140,000 3.5 $9.08 140,000 $9.08
--------- ---------- -------------- ---------- --------------
3,621,261 5.2 $3.90 3,480,845 $4.06
========== ========== ============== ========== ==============
F-25
<PAGE>
NOTE 5 - STOCKHOLDER'S EQUITY (Continued)
Non-employee Directors' Options (Continued)
All stock options issued to employees have an exercise price not less than the
fair market value of the Company's common stock on the date of grant, and in
accordance with accounting for such options utilizing the intrinsic value method
there is no related compensation expense recorded in the Company's financial
statements. Had compensation cost for stock-based compensation been determined
based on the fair value at the grant dates consistent with the method of SFAS
123, the Company's net income and earnings per share for the years ended
December 31, 1997 and 1998 would have been reduced to the pro forma amounts
presented below:
1997 1998
--------------- ---------------
Net loss
As reported............................. $ (2,946,056) $ (4,870,989)
Pro forma............................... $ (3,335,419) (5,374,773)
Basic and diluted loss per share
As reported............................. $ (0.55) (0.68)
Pro forma............................... $ (0.62) (0.75)
The fair value of option grants is estimated on the date of grants utilizing the
Black-Scholes option-pricing with the following weighted average assumptions for
in 1997, expected life of 10 years: expected volatility of 38.06%, risk-free
interest rates of 6.0%, and a 0% dividend yield. The fair value was calculated
in 1998 using the following assumptions: expected life of 10 years, expected
volatility of 17.59%, risk-free interest rates of 6%, and a 0% dividend yield.
The weighted average fair value at date of grant for options granted during 1997
and 1998 approximated $1.71 and $0.87 per option, respectively.
Due to the fact that the Company's stock option programs vest over many years
and additional awards are made each year, the above pro forma numbers are not
indicative of the financial impact had the disclosure provisions of FASB No. 123
been applicable to all years of previous option grants.
F-26
<PAGE>
NOTE 6 - SIGNIFICANT VENUES AND CONCENTRATION OF CREDIT RISK
Revenues from certain venues comprised 10% or more of total revenues. The
following table shows the percentage of revenues of these venues to total
revenues.
Years ended December 31,
-------------------------------
1997 1998
------------ -----------
Venue A.............................. 25 % 12 %
Venue B.............................. 28 15
Venue C.............................. 10 6
Venue D.............................. - 11
------------ -----------
$ 63 % $ 44 %
============ ===========
NOTE 7 - NOTES RECEIVABLE FROM OFFICERS
On October 23, 1997 and November 17, 1997, the Company obtained the written
consent of the Underwriter to advance the CEO the amounts totaling $100,000 (the
"Advances"), which advances bear interest at a rate of 10% per annum, mature
December 31, 1998 and are evidenced by promissory notes executed by the CEO in
favor of the Company.
At December 31, 1997, the notes receivable balance was $136,194 including
accrued interest income of $1,041. The difference ($35,153) between the December
31, 1997 ending balance ($136,194) and the note receivable were personal charges
($17,007) to the corporate credit card and $18,146 in show fees received by
Stuart on behalf of the Company. Mr. Stuart has since repaid the $35,153 to the
Company. The Company has agreed with the Underwriter not to loan or advance any
further sums to Mr. Stuart, without the prior consent of the Underwriter. As of
December 31, 1998, the amount due from the Chief Executive Officer was $8,306.
In March 1997, the Company agreed with its Underwriter, that it would neither
loan nor advance any sums to or on behalf of Mr. Stuart other than those sums
advanced to Mr. Stuart from December 31, 1996 through the date of the IPO,
without the Underwriter's prior written consent. The Company also received the
authorization from the Underwriter, to advance John Stuart up to another
$150,000 for settlement of certain litigation pending against Mr. Stuart for his
involvement in the Legends in Concert, Hawaii show.
During 1998, the Company advanced $63,213 to an officer of the Company. This
advance is payable April 12, 1999 and bears interest at 8%. For the year ended
December 31, 1998, $3,803 of interest was accrued and added to the balance of
the advance. The note is secured by the officer's 40,532 shares of common stock.
In April 1999, the Company extended the maturity date of the note to December
31, 1999.
F-27
<PAGE>
NOTE 8 - EXPENSES AT DISCONTINUED LOCATION
The Company decided to close its Legends production in Daytona Beach on December
31, 1997. As part of the closing, the Company incurred additional expenses of
$489,285 during 1997. Additionally, in 1998 the Company wrote-off $443,096 in
net assets. The Company has plans to transfer all the remaining furniture and
equipment at the Daytona Beach facility to other locations which have
performances in 1999.
NOTE 9 - INTEREST EXPENSE
As more fully discussed in Note 3, the conversion of the Debentures resulted in
a one time, non-recurring, interest expense charge of $194,228 and the Bridge
Financing resulted $366,000 original issue discount and interest expense during
1997.
NOTE 10 - INCOME TAXES
Income taxes in the statement of operations consists of the following:
1997 1998
------------- -------------
Current
Federal..............................$ - $
State................................ 6,673
------------- --------------
$ 6,673 $
============= ==============
Deferred taxes are as follows:
Years ended December 31,
------------------------------
1997 1998
------------- --------------
Deferred tax assets
Litigation accrual.................. $ 21,080 $ 74,480
Allowance for doubtful accounts..... - 94,872
Impairment loss..................... - 155,464
Start-up costs...................... - 222,938
Net operating loss carryforward..... 848,426 2,399,773
------------- --------------
Total deferred tax assets............. 869,506 2,947,527
Less: Valuation allowance............. (869,506) (2,947,527)
------------- --------------
$ - -
============= ==============
The net deferred tax assets have a 100% valuation allowance as management cannot
determine if it is more likely than not that the deferred tax assets will be
realized.
F-28
<PAGE>
NOTE 10 - INCOME TAXES (Continued)
Income taxes in the statement of operations differs from the amount computed by
applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:
Years ended December 31, 1997 1998
------------------------------ --------- ----------
U.S. Federal statutory rate
applied to pretax income (loss).............$(999,390) $(1,641,139)
Permanent differences........................ 5,663 144,149
State income taxes, net of Federal benefit... 2,269 -
Tax effect of unrecognized net
operating loss carry forward................ 998,131 1,496,990
---------- ----------
$ 6,673 $ 0
========== ==========
At December 31, 1998, the Company had Federal and state net operating loss
carryforwards of approximately $3,138,544 and $6,315,193, respectively, which
expires in 2018. Under Federal Tax Law IRC Section 382, certain significant
changes in ownership that the Company is currently undertaking may restrict the
future utilization of these tax loss carryforwards.
NOTE 11 - BUSINESS ACQUISITIONS
Interactive Purchase and Disposition
On November 1, 1996, the Company entered into a common stock purchase with
Interactive Events, Inc. ("Interactive"), which creates and implements
interactive events for parties and conventions. The Company issued 19,284 and
11,020 shares of common stock on November 1, 1996 and November 1, 1997,
respectively, as payment. The Company recorded $129,180 as the excess of the
purchase price over the net assets acquired, which was being amortized over ten
years. At December 31, 1998, the Company determined there was an impairment in
the value of the excess of the purchase price over the net assets acquired in
connection with the Interactive purchase and wrote off the remaining unamoritzed
balance of $102,131.
On February 23, 1999, the Company entered into a Common Stock Purchase Agreement
with Richard S. Kanfer, the Company's former Vice President of Sales and former
owner of Interactive Events, Inc. ("Kanfer"), pursuant to which the Company
agreed to reconvey all of the assets of Interactive Events, Inc. to Kanfer, in
exchange for 30,304 shares of the Company's Common Stock, a non-plan option to
purchase 15,000 shares of the Company's Common Stock and 19,835 incentive stock
options to purchase shares of the Company's Common Stock. In addition, the
Company and Kanfer agreed to mutually release each other from any liability
arising out of the original purchase of Interactive Events, Inc. by the Company
from Kanfer and any claim relating to Kanfer's subsequent employment with the
Company. Contemporaneous therewith, the Company and Kanfer entered into a right
of representation agreement, pursuant to which the Company granted to Kanfer the
right to exclusively represent its "Legends" production in designated areas in
return for a division of the gross proceeds generated from any production
thereof.
F-29
<PAGE>
NOTE 11 - BUSINESS ACQUISITION (continued)
Gedco USA, Inc. Acquisition
On March 13, 1998, the Company completed its acquisition of certain assets from
Gedco USA, and its affiliates for a purchase price of $14,000,000, consisting of
$11,500,000 in cash and 595,238 shares of common stock valued at $2,500,000 (the
"Gedco Acquisition").
Included in the Gedco Acquisition were substantially all of the income producing
assets and associated real property of Orlando Entertains and LA Entertains,
consisting of King Henry's Feast, Blazing Pianos piano bar, the Fort Liberty
shopping complex that includes a Wild Bill's Dinner Theater, each of which is
located in greater Orlando, Florida, and a second Wild Bill's Dinner Theater
located in Buena Park, California. Gerard O'Riordan, President of Gedco USA,
Inc., joined the Company as President of On Stage Theaters, Inc., a wholly
subsidiary of the Company that manages the acquired dinner theaters and piano
bar as well as other selected theaters.
The Company funded the cash portion of the purchase price and transaction fees
and expenses with $12.5 million of mortgage financing from Imperial Credit
Commercial Mortgage Investment Corp. ("ICCMIC") (see Note 3).
The components of the purchase price and its allocation to the assets and
liabilities are as follows:
Amount
-------------
Purchase price:
Liabilities assumed............................... $ 986,044
Issuance of 595,238 restricted shares
of common stock................................... 2,500,000
-------------
3,486,044
-------------
Cost of acquisition incurred........................ 1,645,874
Cash paid.......................................... 11,500,000
-------------
$ 16,631,918
=============
F-30
<PAGE>
NOTE 11 - BUSINESS ACQUISITION (continued)
Cash paid for the purchase of Gedco, USA, Inc. net of cash received is as
follows:
Amount
-------------
Cash paid to sellers................................ $ 11,500,000
Acquisition costs................................... 1,645,874
--------------
13,145,874
Less cash received.................................. (383,444)
--------------
$ 12,762,430
--------------
The costs of acquisition increased primarily relates to the lenders origination
fee of $750,000, legal fees of $240,000, financing fees of $100,000, recording
fees of $100,000, and accounting fees of $125,000.
The acquisition was accounted for as a purchase and the assets acquired were
recorded at a fair market value. The building and equipment are being
depreciated over twenty and three years, respectively, under the straight-line
method. The costs of acquisition incurred primarily relates to the lenders
origination fee of $750,000, legal fees of $240,000, financing fees of $100,000,
recording fees of $100,000, and accounting fees of $125,000. The allocation of
the purchase price was as follows:
Amount
---------------
Cash.............................................. $ 383,444
Inventory......................................... 120,084
Prepaid expenses.................................. 157,516
Land.............................................. 11,275,507
Building.......................................... 3,214,740
Equipment......................................... 730,627
Deferred financing acquisition expenses........... 750,000
---------------
Deferred financing acquisition expenses........... $ 16,631,918
---------------
NOTE 11 - BUSINESS ACQUISITIONS (Continued)
The assets acquired and liabilities assumed were transferred to either the
Company's wholly-owned subsidiary, On Stage Theaters, Inc., or wholly owned
subsidiaries of On Stage Theaters, Inc., concurrent with the acquisition.
The Gedco acquisition was accounted for as a purchase and the operations of
Gedco are included in the Company's operations as of the date of the
acquisition.
The unaudited pro forma results of operations presented below reflect the
Company's operations as though the acquisition had taken place at the beginning
of each period presented. The pro forma results have been prepared for
comparative purposes only, and are not necessarily indicative of what the actual
result of operations would have been had such acquisitions occurred at the
F-31
<PAGE>
NOTE 11 - BUSINESS ACQUISITION (continued)
beginning of the periods presented, or what results of operations will be in the
future.
Years ended December 31,
-------------------------------
1997 1998
------------- -------------
Revenues............................ $ 29,601,646 $ 30,328,361
Operating income (loss)............. 618,756 (3,003,214)
Net loss............................ (1,922,522) (4,758,688)
Basic and diluted loss per share.... (.30) (0.65)
Basic and diluted average number
of common shares outstanding....... 6,396,079 7,307,062
Calvin Gilmore Productions, Inc.
On June 30, 1998, the Company completed its acquisition of certain assets from
Calvin Gilmore Productions, Inc. ("CGP"), an affiliate of Fox Family Worldwide,
for a purchase price of $1,000,000 in cash and 206,612 shares of common stock
valued at $723,142 (the "Fox Acquisition").
Included in the Fox Acquisition were substantially all of CGP's income producing
assets and associated real and personal property in the greater Myrtle Beach,
South Carolina area, consisting of the fee simple purchase of The Surfside Beach
Theater, which the Company had leased from CGP for its presentation of its
flagship Legends in Concert production since 1995, and a leasehold interest in
The Eddie Miles Theater.
The Company funded the cash portion of the purchase price and transaction fees
and expenses with $1,100,000 million of mortgage financing from ICCMIC (see Note
3).
NOTE 12 - IMPAIRMENT OF TORONTO ASSETS
The Company decided to close its Legend's Production in Toronto, Canada on
December 31, 1998. As part of the restructuring, the Company had an impairment
of net assets and wrote off net assets of $409,000.
F-32
<PAGE>
NOTE 13 - SEGMENT INFORMATION
The following information is presented in accordance with SFAS No. 131, which
was adopted by the Company in the fourth quarter of 1998.
The Company derives its net revenues from six reportable segments. The Casino
Division ("Casinos") primarily sells live theatrical productions to Casinos
worldwide for a fixed fee. In addition this division also operates the Company's
Legends show at the Imperial Palace. The Theaters Division ("Theaters") owns or
rents live theaters and dinner theaters in urban and resort tourist locations
primarily in the United States. This division derives its revenues from the sale
of tickets and food and beverage to patrons who attend live theatrical
performances at these venues. The Events Division ("Events") sells live
theatrical productions to commercial clients, which include corporations, theme
and amusement parks and cruise lines for a fixed fee. The Merchandise Division
("Merchandise") sells merchandise and souvenir photography products to patrons
who attend the Company's productions. The Production Services Division
("Production") sells technical equipment and services to commercial clients,
however, this division's primary focus is to technically support all of the
other divisions. The On Stage Entertainment segment is responsible for the
corporate and finance portion of the Company's operations.
The accounting policies of the reportable operating segments are the same as
those described in the Summary of Accounting Policies. The Company's management
evaluates the performance of its operating segments based upon the profit or
loss from operations.
The Company's reportable segments are strategic business units because each
business unit services a different market or performs a specialized function in
support of a given market.
F-33
<PAGE>
NOTE 13 - SEGMENT INFORMATION (Continued)
The following table sets forth the segment profit/(loss) and asset information:
Year Ended December 31, 1998
-------------------------------------------------
Casinos Events Merchandise Theaters
--------- ---------- ----------- -----------
Revenues from
external customer... $6,977,021 $2,554,942 $1,243,451 $17,064,071
Interest expense..... $ 4,712 $ 1,292 $ 193 $ 1,354,370
Depreciation
and amortization... $ 268,780 $ 140,455 $ 5,055 $ 1,086,822
Segment profit (loss) $1,763,584 $ (223,386) $ 252,562 $(2,463,461)
Segment assets....... $ 828,652 $ 439,549 $ 53,606 $20,238,655
Additions to
long-lived assets... $ 327,365 $ 178,341 $ 43,318 $ 6,028,883
Year Ended December 31, 1998
(continued)
-------------------------------------------------
Total
Production OSE Consolidated
---------- ---------- ------------
Revenues from
external customer... $ 7,991 $ - $ 27,847,476
Interest expense..... $ - $ 194,310 $ 1,554,877
Depreciation
and amortization... $ 47,705 $ 260,709 $ 1,806,526
Segment profit (loss) $ (558,204) $(3,642,084) $ (4,870,989)
Segment assets....... $ 571,692 $ 1,957,065 $ 24,089,219
Additions to
long-lived assets... $ 60,001 $ 840,450 $ 2,478,358
F-34
<PAGE>
NOTE 13 - SEGMENT INFORMATION (Continued)
Year Ended December 31, 1997
-------------------------------------------------
Casinos Events Merchandise Theaters
--------- ---------- ----------- -----------
Revenues from
external customer... $6,326,952 $2,552,440 $ 454,842 $ 6,391,840
Interest expense..... $ - $ (297) $ - $ -
Depreciation
and amortization... $ 141,275 $ 6,221 $ - $ 323,336
Segment profit (loss) $2,048,288 $ 193,650 $ 315,153 $ (281,821)
Segment assets....... $ 642,428 $ 196,388 $ - $ 865,202
Additions to
long-lived assets... $ 248,688 $ 45,093 $ - $ 724,232
Year Ended December 31, 1997
(continued)
-------------------------------------------------
Total
Production OSE Consolidated
---------- ---------- ------------
Revenues from
external customer... $ - $ - $ 15,726,074
Interest expense..... $ - $ 834,630 $ 834,333
Depreciation
and amortization... $ - $ 511,348 $ 982,180
Segment profit (loss) $ (194,694) $(5,026,632) $ (2,946,056)
Segment assets....... $ 494,949 $ 4,278,296 $ 6,477,263
Additions to
long-lived assets... $ 120,868 $ 156,058 $ 1,294,939
F-35
<PAGE>
NOTE 14 - SUBSEQUENT EVENTS
Note Payable to Principal Stockholder
On March 4, 1999, the Board of Directors approved the acceptance of a $100,000
loan from John W. Stuart, the Company's Chairman, Chief Executive Officer and
Principal Stockholder (the "Stuart Loan"). The Stuart Loan is evidenced by a
promissory note bearing twelve percent (12%) interest, which matures one year
from the date of issuance, or on March 3, 2000. In consideration for the Stuart
Loan, the Board of Directors approved the issuance of 100,000 warrants to
purchase shares of the Company's common stock at a strike price of $1.00, which
was market price on the closing date of the Stuart Loan. Additionally, the
Company agreed to pay Mr. Stuart's legal fees associated with this transaction.
On April 5, 1999, the Company entered into an agreement with John W. Stuart, the
Company's Chairman, Chief Executive Officer and Principal Stockholder ("Mr.
Stuart"), pursuant to which Company agreed to accept a bridge loan from Mr.
Stuart in an amount up to $500,000 in return for a one year promissory note
bearing 12% interest, a 5% origination fee and one warrant to purchase shares of
the Company's Common Stock for each $1.00 invested. To date, the Company has
accepted $200,000 of the potential $500,000 from Mr. Stuart.
F-36
<PAGE>
EXHIBIT 21
PARENT CORPORATION AND (STATES OF QUALIFICATION)
1. On Stage Entertainment, Inc., a Nevada corporation (South Carolina, Missouri,
Florida, Pennsylvania, New Jersey, Wisconsin and Texas.
NAME, JURISDICTION AND (STATES OF QUALIFICATION) FOR ALL SUBSIDIARIES
1. On Stage Theaters, Inc., a Nevada corporation (California*)
2. On Stage Theaters Surfside Beach, Inc., a Nevada corporation (South
Carolina)
3. On Stage Theaters North Myrtle Beach, Inc., a Nevada corporation (South
Carolina)
4. On Stage Theaters Canada, Inc., an Ontario corporation 5. Blazing Piano's,
Inc., a Nevada coropration (Florida) 6. Fort Liberty, Inc., a Nevada corporation
(Florida) 7. King Henry's, Inc., a Nevada corporation (Florida) 8. Wild Bills
California, Inc., a Nevada corporation (California) 9. On Stage Casino
Entertainment, Inc., a Nevada corporation 10. On Stage Merchandise, Inc., a
Nevada corporation 11. On Stage Events, Inc., a Nevada corporation 12. On Stage
Marketing, Inc., a Nevada corporation 13. On Stage Productions, Inc., a Nevada
corporation 14. Legends in Concert, Inc., a Nevada corporation (Florida)
*On Stage Theaters, Inc. does business as On Stage Dinner Theaters, Inc. in
California.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements set forth in the Form 10KSB of On Stage Entertainment, Inc.
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001035514
<NAME> On Stage Entertainment, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 1010
<SECURITIES> 0
<RECEIVABLES> 1265
<ALLOWANCES> 0
<INVENTORY> 243
<CURRENT-ASSETS> 3316
<PP&E> 24130
<DEPRECIATION> 4396
<TOTAL-ASSETS> 24089
<CURRENT-LIABILITIES> 20107
<BONDS> 786
0
0
<COMMON> 75
<OTHER-SE> 3121
<TOTAL-LIABILITY-AND-EQUITY> 24089
<SALES> 27847
<TOTAL-REVENUES> 27847
<CGS> 8968
<TOTAL-COSTS> 22228
<OTHER-EXPENSES> 8935
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1555
<INCOME-PRETAX> (4871)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4871)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4871)
<EPS-PRIMARY> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
